Case Study: A Trade-Dependent Economy’s Unique Approach

Background

Singapore represents a rare case in modern monetary policy. While most central banks worldwide manipulate interest rates to control inflation and stimulate growth, the Monetary Authority of Singapore (MAS) has developed an exchange rate-centered framework that reflects the city-state’s unique economic structure.Key Expectations: The Monetary Authority of Singapore (MAS) is widely expected to keep monetary policy unchanged at Thursday’s review—15 out of 16 analysts polled anticipate no changes.

Why No Change is Expected:

• Strong economic performance: Singapore’s GDP grew 4.8% in 2025, well above the government’s November forecast of 4.0%
• Controlled inflation: Core inflation remained stable at just above 1% in November
• Robust tech sector: The electronics PMI reading of 50.9 in December shows continued momentum, supported by AI-related demand and rising memory chip prices

Recent Policy History: MAS held settings steady in July and October 2025 after easing policy in January and April of that year.

Differing Views on Future Policy:

• Standard Chartered expects MAS to tighten policy at the April review as inflation bottoms out and trade uncertainties ease
• Bank of America suggests MAS could tighten as soon as Thursday’s meeting based on strengthening inflation signals in December data, potentially raising the 2026 core inflation forecast from 0.5-1.5% to 1.0-2.0%

How Singapore’s Monetary Policy Works: Unlike most central banks that adjust interest rates, MAS manages monetary conditions by allowing the Singapore dollar to rise or fall against a basket of trading partner currencies within an undisclosed band (the S$NEER). They adjust the slope, mid-point, and width of this band.

The Singapore Context

Singapore’s economy exhibits characteristics that make traditional monetary policy less effective:

• Trade dependency: Gross exports and imports exceed 300% of GDP
• Import penetration: Nearly 40% of domestic spending flows to imported goods and services
• Small domestic market: Limited scope for domestic interest rate transmission
• Open capital account: Free flow of capital reduces interest rate policy effectiveness
• Price-taker status: As a small economy, Singapore accepts international prices rather than setting them

Policy Framework in Action

The S$NEER policy band operates through three mechanisms:

1. Slope Adjustment The gradient of the policy band determines the appreciation or depreciation path. A steeper upward slope allows the Singapore dollar to strengthen faster, dampening imported inflation. During the 2022 inflation surge, MAS increased the slope twice in off-cycle moves to combat rising prices.

2. Level Recalibration Shifting the mid-point of the band creates an immediate currency adjustment. This tool serves as emergency intervention during severe economic shocks, such as the Asian Financial Crisis in 1997-1998 or the COVID-19 pandemic.

3. Width Modification Expanding the band width permits greater exchange rate volatility, giving the economy more flexibility to absorb external shocks. Narrowing it provides stability during uncertain periods.

Recent Performance

From 2020 to 2024, Singapore’s approach demonstrated resilience:

• Successfully navigated pandemic-era disruptions
• Managed imported inflation from global supply chain issues
• Maintained price stability while supporting economic recovery
• Adapted to US Federal Reserve rate hikes without mirroring them

Outlook: Challenges and Opportunities Ahead

Near-Term Outlook (2026-2027)

Global Economic Headwinds

• US monetary policy normalization creating currency pressures
• China’s economic slowdown affecting regional trade flows
• Geopolitical tensions disrupting supply chains
• Diverging inflation trajectories across trading partners

Domestic Considerations

• Aging population increasing healthcare and social spending
• Transition to higher-value economic activities
• Climate change adaptation costs
• Housing affordability pressures

Medium-Term Trends (2028-2030)

Structural Shifts The exchange rate mechanism may face new tests as Singapore’s economy evolves. Digital currencies, changing trade patterns from reshoring trends, and potential shifts in major trading partner relationships could alter how effectively the S$NEER influences domestic prices.

Policy Evolution MAS has already demonstrated adaptability by moving to quarterly policy reviews in 2024. Further refinements may include enhanced communication strategies, integration of climate-related financial risks, and coordination with fiscal policy as government spending increases.

Solutions: Policy Options and Recommendations

For Current Economic Environment

1. Enhanced Policy Transparency While maintaining the undisclosed band levels provides flexibility, MAS could improve forward guidance on the conditions triggering slope, level, or width adjustments. This would help businesses and households plan more effectively.

2. Complementary Fiscal Coordination The government should align fiscal policy more closely with monetary objectives. During periods when MAS cannot sufficiently tighten or ease through exchange rate adjustments alone, targeted fiscal measures can fill gaps.

3. Macroprudential Tools Strengthen existing measures around property cooling, corporate debt management, and household leverage to reduce reliance solely on the exchange rate channel for managing financial stability.

For Long-Term Resilience

1. Diversification of Trading Partners Reducing concentration risk by deepening trade relationships across more diverse regions will make the S$NEER basket more stable and the policy band more effective.

2. Productivity Enhancement Investing in workforce skills, automation, and innovation can reduce inflation pressures from wage growth, giving MAS more room to support growth through gradual currency depreciation when needed.

3. Financial Market Development Deepening local currency bond markets and expanding hedging instruments will help businesses manage exchange rate volatility within the policy band.

4. Digital Currency Preparedness Develop frameworks for how central bank digital currencies (CBDCs) or widespread adoption of digital assets might affect the transmission mechanism of exchange rate policy.

Singapore Impact: Economic and Social Implications

Economic Impacts

Price Stability Achievement Singapore’s inflation has generally remained moderate compared to peers. From 2015 to 2019, core inflation averaged around 1.5%, demonstrating the effectiveness of the exchange rate anchor. Even during the 2022-2023 global inflation surge, Singapore’s price increases remained more contained than many developed economies.

Trade Competitiveness The gradual, predictable appreciation path of the Singapore dollar provides exporters with stability for planning while keeping inflation in check. This balance has supported Singapore’s position as a global trade hub and logistics center.

Foreign Investment Flows The policy band creates a stable, business-friendly environment. The predictable currency framework, combined with strong institutions, has made Singapore a preferred destination for regional headquarters and financial services.

Financial Sector Development The exchange rate regime has supported Singapore’s emergence as a wealth management and fintech hub. Currency stability attracts assets under management and enables the city-state to serve as a safe haven during regional turbulence.

Social Impacts

Cost of Living Management For households, the S$NEER policy directly affects purchasing power. A stronger Singapore dollar makes imported goods, overseas education, and foreign travel more affordable, benefiting the population’s quality of life. However, this must be balanced against potential impacts on export-sector employment.

Wage Dynamics By controlling imported inflation, the exchange rate policy helps protect real wages. Workers don’t face the erosion of purchasing power that high inflation causes, though wage growth itself depends on productivity improvements and labor market conditions.

Income Inequality Considerations Higher-income households benefit more from currency strength through overseas investments, foreign property, and international travel. Lower-income households, while benefiting from cheaper imports, may face challenges if export-sector jobs decline due to reduced competitiveness.

Housing Affordability The exchange rate policy indirectly affects property prices through its impact on construction costs (many materials are imported) and foreign buyer demand. A stronger currency can reduce construction input costs but may also attract foreign investment into property markets.

Broader Economic Implications

Business Planning Horizon The quarterly review cycle provides businesses with more frequent updates on policy direction, but also requires more active monitoring. Companies must develop sophisticated treasury functions to manage within-band volatility while planning for potential slope or level adjustments.

Regional Economic Leadership Singapore’s successful unconventional approach enhances its credibility as a financial center and policy innovator. This attracts international organizations, research institutions, and serves as a model for other small, open economies.

Resilience Testing The exchange rate mechanism has proven adaptable across multiple crisis periods. However, unprecedented challenges such as prolonged deglobalization, major trading partner currency instability, or rapid digital currency adoption could test the framework’s limits.

Future Considerations

As Singapore navigates demographic aging, climate transition, and technological disruption, the exchange rate policy must evolve. The fundamental logic—that currency management is more powerful than interest rates for a trade-dependent economy—remains sound. But the specific implementation, communication, and coordination with other policy tools will need continuous refinement.

The success of Singapore’s monetary policy ultimately depends not just on technical excellence in managing the S$NEER, but on maintaining the broader economic fundamentals: fiscal prudence, regulatory quality, infrastructure investment, and human capital development that make the framework credible and effective.