What is the S$NEER and what does it mean when the MAS tightens its monetary policies?

Get to know what the S$NEER is and what it means whenever something happens.

 

Inflation has dominated the global news headlines in the past year and it is no different here in Singapore. Central banks around the world led by the US Federal Reserve reacted by increasing their benchmark rates aggressively to try and contain inflationary expectations.

Singapore's central bank, the Monetary Authority of Singapore (MAS) did the same by tightening its monetary policy four times in 2022, with the most recent being in October. The city-state’s better-than-expected economic growth also gave policymakers more leeway to rein in inflation running near a 14-year high.

On Oct 14, the MAS, at a scheduled policy meeting, said it will re-centre the mid-point of the exchange rate policy band known as the Singapore dollar nominal effective exchange rate, or S$NEER. In the announcement, MAS stated that there will be no change to the slope and width of the band. The move was the fifth time MAS has intervened in the Singapore dollar (SGD) exchange rate since October 2021 as inflation pressures remain elevated.

Singapore’s core inflation rate, which is the central bank's favoured indicator price measure, stood at 5.1% in November. Core inflation is expected to average around 4.0% in 2022 and is estimated to remain elevated in the next few quarters before slowing in the second half of 2023.

The S$NEER defined 

The S$NEER is a policy set by the MAS to effectively control interest rates within the city-state and to ensure price stability in the medium term.

MAS

Source: MAS

In Singapore, monetary policy is centred on exchange rates. As opposed to typical central bank monetary policy moves of directly setting or manipulating interest rates, MAS targets the exchange rates.

Why use exchange rates as a policy tool, you ask? Three things:

1. Singapore’s domestic market for loans and investment is small in relative terms compared to its trade.

2. Trade however is huge and exchange rates directly impact trade significantly.

3. In a small economy, targeting interest rates will lead to unproductive inflows and outflows of hot money which leads to severe fluctuations in the exchange rates. Hot money flows are not beneficial for trade-dependent countries like Singapore.

The BBC principles of Singapore’s monetary policy 

Basket - The Singapore dollar is managed against a figurative basket of currencies of our major trading partners. Although MAS does not disclose which currencies are in the basket, we can safely assume that it would consist of the US dollar (USD), Euro, Japanese yen (JPY), Malaysian ringgit, and the Chinese yuan or renminbi (RMB).

Band - An invisible upper and lower limit trading band is imposed on the SGD. MAS will intervene in the exchange rate market should the SGD move outside the band by buying or selling the Singapore dollar.

Crawl - A crawl function is incorporated whereby the SGD is continually assessed to be aligned with economic fundamentals of the Singapore economy with regard to its major trading partners. Typically, this involves a twice-yearly review of the policy band.

The policy typically has three policy stances depending on the economic situation in Singapore and globally.

1. Neutral - zero percentage appreciation

2. Normal - modest and gradual appreciation of the SGD

3. Tightening - controlled appreciation to contain domestic inflation

How does MAS influence the settings within the S$NEER framework? It does it by manipulating three distinct settings within the framework as explained below.

The slope

Manipulation to the slope of the band is the first tool used by MAS to influence the exchange rate. Basically, the angle of the slope determines the pace of Singapore dollar appreciation or depreciation rate.

If the slope is reduced, it means that the SGD will appreciate or deprecate at a slower rate which means that our currency will be allowed to strengthen or weakened at a slower pace. Conversely, if the slope is increased the SGD will appreciate or depreciate at a faster pace.

The width

The width of the band sets the limit on how far the SGD is “allowed” to fluctuate. This trading band determines volatility of the currency. The wider the width means that the SGD is “allowed” to fluctuate higher or lower which means that the currency movement will be more volatile and can appreciate or depreciate by a larger percentage. This is typically used in periods of heightened uncertainties like the one we are in right now with the inflationary pressures, increasing global interest rates and the war in Ukraine.

The mid point

Should MAS decide that it needs immediate intervention to the currency exchange or interest rates, midpoint rate adjustment is used. In comparison to the above other two methods, adjusting the midpoint either in an upwards or downwards trajectory is more likely to yield an immediate impact.

How do the policy settings affect the common man during an inflationary environment?

Basically, a tightening of monetary policy means that MAS will allow the SGD to appreciate within the revised policy band to ensure that imports will remain affordable hence putting a cap of price rises. To illustrate this scenario from a common man's perspective, take the price of fresh chicken of which 100% is imported from overseas suppliers. For ease of this example, we will use the price of importing fresh chicken from Malaysia. The cost of Malaysian chicken producers is pegged to the Malaysian ringgit. Due to the rising cost of feed to the Malaysia chicken producer, they decided to increase the price of chicken by 10% in Malaysian ringgit. At the same time, due to the tightening monetary S$NEER measures adopted by MAS, the SGD appreciated against the ringgit by 10%. This would render the price increase (inflation) from the Malaysian producers seemingly neutral as the chicken price in SGD would remain the same hence blunting the “imported” inflationary pressure. To the Singapore consumer, inflation is oblivious at best.

Weiyang is an aspiring analyst in the fields of investment banking and private equity. He is currently an Equity Research Analyst at the National University of Singapore (NUS) Investment Society, Investment Analyst at Protégé Ventures and a Macroeconomics Analyst for Victoria Investment Fund. In addition, he is also the Co-Founder/President of the NUS Private Equity Club. On the academic front, he is pursuing a business degree at the National University of Singapore majoring in finance

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