CPI + 5.2%

[greengiraffe]

very logical thinking. Hence foreign $ inflow is stoking asset inflation and locals with huge savings are made to work harder and assume more risks to generate better returns than artificially depressed bank interest rates.

definitely goes against textbook economic theories.

to make the exchange rate centered monetary policies to work perfectly, I think, one condition is that the trade should be well balanced, that is, money will come in and money will go out. If aggregated money flow towards one direction for a persistent long period, the balance will be completely broken, which can easily cause catastrophic disaster. that means, if previously money is flowing in and you counter by appreciating the currency, it will cause more money coming in(Is now a perfect example of this?). and if previously money is flowing out and you counter by depreciating the currency, it will cause further money outflow(I think 1997 AFC is a good example).

not advance economy trained, my own speculation only. please correct me if i am wrong.

[freedom]

http://www.mas.gov.sg/resource/publicati...Policy.pdf

paragraph 5.5,

Other possible intermediate targets, in particular interest rates, are less effective in influencing real economy activity and domestic inflation outcomes.

anyone has any reference about why MAS made such point? Thanks.

[Jared Seah]

The US Fed gets no love.

Half it's detractors will either blame it for destroying savers with negative real interest rates and fueling asset inflation; while the other half will blame it for not being accommodative enough to create jobs and support businesses...

I guess the same goes with MAS.

How about Australia with its relatively "strong" AUD and "higher" interest rate? It's a polarised economy and your happiness index may depend whether you are working in the resources sector or not.

There's no such thing as 1 size fits all. We will say or support the measures that benefit us the most and hurt us the least.

1) If I do not have any outstanding car or housing loans, and/or I am not a business owner, I of course will say let interest rate increase!

2) If I like to travel overseas for vacations or wish to invest in overseas assets, or work in a company with mainly domestic sales, of course I would say let Sing dollar appreciates!

3) If I own equities, properties, gold and other assets, and having gone through asset deflation during Asian 97, I would prefer a "little" inflation like now.

There is no reality. What we believe is the reality

[camelking]

There is no reality. What we believe is the reality.

Nice statements.

[shanrui_91]

to make the exchange rate centered monetary policies to work perfectly, I think, one condition is that the trade should be well balanced, that is, money will come in and money will go out. If aggregated money flow towards one direction for a persistent long period, the balance will be completely broken, which can easily cause catastrophic disaster. that means, if previously money is flowing in and you counter by appreciating the currency, it will cause more money coming in(Is now a perfect example of this?). and if previously money is flowing out and you counter by depreciating the currency, it will cause further money outflow(I think 1997 AFC is a good example).

not advance economy trained, my own speculation only. please correct me if i am wrong.

you are right in this way. A country that chooses exchange rate will have to make a choice between allowing free capital flow or controlling interest rate.
However, appreciation does not attract capital inflow, only if the currency is expected to appreciate then will capital flow in.

USD has been depreciating not just because of QE 1 and 2 but people is expecting a QE 3 which will cause USD to depreciate further. As US chooses free capital flow and interest rate, it will not be able to fight against its depreciating currency. Yes, it can try, but it will require strong foreign currency reserve to defend against. Even if a country like Singapore has strong reserve, it will not want the reserve to be eroded as it is meant for the raining day.

Capital flow is determined by various factors of which interest rate is one of the main reason.

For e.g. 1 USD is 1.25 SGD currently, but USA has an interest rate of 5% while Singapore's interest rate is 2%. The right thing to do will then be to sell SGD to buy USD to take advantage of this higher interest rate. This will then cause USD to appreciate as there is higher demand for USD and higher supply for SGD. Thus if Singapore wants to restrict capital flow, it will then have to use interest rate policy to counter this difference in interest rate.

Person A and B with 100 USD and 125 SGD respectively. Using same forex rate, but that Singapore and USa have same interest rate of 2% for easier understanding. If forex changes to 1USD is to 1.2 SGD as SGD appreciates, then person B will now be tempted to change its 125 SGD to USD as he can now earn 2% on 104.1 USD. The USD can also allow him to purchase 104 pens instead of 100 pens earlier on, given that 1 pen is worth $1. If Singapore wants to curb this outflow, it will then have to raise its interest rate. And to curb capital inflow, they have to use interest rate policy to lower interest rate and not to increase interest rate.

Currently, it is due to uncertainty in EU and US that causes capital inflow into Asia and emerging market. As growth is expected to be higher in these market, capital will flow in to take advantage of the difference in growth.


What happen in 1997 is as a result of choosing free capital flow and a fixed exchange rate. Thailand has been growing before that due to huge influx of hot money and FDI. As the bubble starts to burst, capital outflow increases and Thai Baht suffers depreciative forces of which it tries to buy up Thai Baht due to its fixed exchange rate. At the same time, they try to use an interest rate policy to try to curb free capital flow as they do not have sufficient reserve. THis proves to be useless and Baht eventually falls.

The lesson from 1997 is not the need to curb capital flow but that if a country chooses to have a fixed exchange rate, it needs to have sufficient foreign currency reserve to prevent such an attack. This means more trade surplus

As for why interest rate policy is less effective in Singapore, I have already mentioned main reasons like inactive secondary bond market, high saving rate, high import percentage and banks with strong balance sheet.

[freedom]

in 1997, MAS was implementing exchange rate monetary policies as well. Did SGD not depreciate in AFC along with the rest? Did the banks have strong balance sheet then?

I believe Japan has high import percentage and high saving rate, but it still implements interest rate monetary policies.

inactive secondary bond market? I don't see how it will stop central banks from implementing interest rate monetary policies. Central banks deal with primary dealers only for repo or reverse repo, which is certainly not secondary market.

[yeokiwi]

So, does the cheapo loans caused skyhigh COE?
We love to think that we cannot afford that shiny merc simply because some fellows are willing to finance the cars with 10 years loan.
In actual fact, the vehicle loan was rather stable throughout the last decade.
http://www.singstat.gov.sg/stats/themes/...e00-10.pdf

We also like to think that the skyhigh properties are caused by cheapo loans. But, in actual fact, Singaporeans are rich.
From 2000 to 2010,
Singaporeans' deposit increases from 114 billion to 247 billion
Singaporeans' CPF increases from 90 billion to 185 billion
Singaporeans' mortgage loan only increases from 102 billion to 158 billion.

Are we having a bubble??? maybe a small small one.

[shanrui_91]

SGD did depreciate by a huge percentage but that was planned by the government to increase our export's competitiveness. Growth and not inflation was the main concern then.

For Japan, Total GDP is USD5.85 trillion, Import is USD794 billion and export is USD800 billion.
For Singapore, Total GDP is USD251 billion, Import is USD310 billion and export is USD358 billion.

As seen from above figures, total trade is merely 25% of GDP for Japan whereas in Singapore total trade is 2.5-3 times our GDP. This is uniquely Singapore due to the lack of resources.

Interest rate policy works in 2 way through banks and bond market simultaneously. To curb inflation, interest rate will be raised.
For banks, the point is to restrict lending, by asking for higher reserve from bank or by lending to banks at higher rate. There will be higher deposits placed with banks sucking up part of the liquidity from savers.
For bond market, the point is to absorb the additional liquidity through bond. If I offer a 1 billion SGS bond today and they get fully subscribed, SGD 1 billion will be withdrawn from the economy and placed with the government. Bond market is neccessary to suck up the liquidity of the hot money.

Interest rate policy still can work without a bond market but it will be much less effective. One reason why SGS has not been as developed is the government always have budget surplus unlike other countries.

Having a high saving rate also means is it is less effective. For e.g. if currently, 40% of all money are saved in the bank. With a 100% rises in interest rate, maybe another 40% will get saved up in the bank as 20% are needed for spending. However if only 20% of all money are saved in the banks, it is more likely to get more money saved up in the bank of up to 80% given that 20% are needed for spending.

bank A has equity of 1m and debt of 19m while bank B has equity of 1m and debt of 17m. When the central bank raise the reserve ratio, both banks have to contribute 0.5m. Bank B is likely to continue its lending activity while Bank A will have to restrict its lending ability to meet the Basel requirement

[freedom]

SGD did depreciate by a huge percentage but that was planned by the government to increase our export's competitiveness. Growth and not inflation was the main concern then.

For Japan, Total GDP is USD5.85 trillion, Import is USD794 billion and export is USD800 billion.
For Singapore, Total GDP is USD251 billion, Import is USD310 billion and export is USD358 billion.

As seen from above figures, total trade is merely 25% of GDP for Japan whereas in Singapore total trade is 2.5-3 times our GDP. This is uniquely Singapore due to the lack of resources.

Interest rate policy works in 2 way through banks and bond market simultaneously. To curb inflation, interest rate will be raised.
For banks, the point is to restrict lending, by asking for higher reserve from bank or by lending to banks at higher rate. There will be higher deposits placed with banks sucking up part of the liquidity from savers.
For bond market, the point is to absorb the additional liquidity through bond. If I offer a 1 billion SGS bond today and they get fully subscribed, SGD 1 billion will be withdrawn from the economy and placed with the government. Bond market is neccessary to suck up the liquidity of the hot money.

Interest rate policy still can work without a bond market but it will be much less effective. One reason why SGS has not been as developed is the government always have budget surplus unlike other countries.

Having a high saving rate also means is it is less effective. For e.g. if currently, 40% of all money are saved in the bank. With a 100% rises in interest rate, maybe another 40% will get saved up in the bank as 20% are needed for spending. However if only 20% of all money are saved in the banks, it is more likely to get more money saved up in the bank of up to 80% given that 20% are needed for spending.

bank A has equity of 1m and debt of 19m while bank B has equity of 1m and debt of 17m. When the central bank raise the reserve ratio, both banks have to contribute 0.5m. Bank B is likely to continue its lending activity while Bank A will have to restrict its lending ability to meet the Basel requirement

pardon me, how does all above explain why exchange rate is a better monetary policy than interest rate for domestic liquidity?

yes, I agree. interest rate policy is not perfect and applied to everywhere, especially if used incorrectly. But I don't see how exchange rate is supposed to manage domestic liquidity better than interest rate.

or would I say why MAS does not use both to manage inflation rather than must choose one only? given that Singapore does not have a fix exchange rate, means it is free to have an independent interest rate based monetary policy.

or would I say, how MAS is supposed to use its exchange rate policy to stop domestic accumulated 'hot' money from injecting liquidity into market?

[corydorus]

I have been struggling with this idea. Maybe you can help me to understand the logic better.

"For bond market, the point is to absorb the additional liquidity through bond. If I offer a 1 billion SGS bond today and they get fully subscribed, SGD 1 billion will be withdrawn from the economy and placed with the government. Bond market is neccessary to suck up the liquidity of the hot money. "

1. When money is placed with government. What they do with them ? I assume spend it. Isn't this just re-routing liquidity only ?

2. Since this money buys gov bond, they comes from people who play it safe therefore likely stay in bank. And the restriction by banks thru' bank lending. Compared to gov spending, which generate more chunks ?

Cory