How Does MAS Policy Impact The Singapore Dollar? And Why Should You Care?

Gatherings of central bankers sound about as much fun as having our wisdom teeth extracted…without painkillers. But–believe it or not–all that technical terminology and economics theory as well as forecasting actually do impact us in our day-to-day lives. 

That’s because the level of interest rates kind of determine the broader cost of money across the economy–whether that’s the rate you pay on the loan for your home or the cost of a car loan (have you seen the latest COE prices?!).  

Anyway, in Singapore, our central bank is called the Monetary Authority of Singapore (MAS). However–just like the Little Red Dot itself–the MAS is unique. “How so?” you may ask. Well, most central banks like to determine monetary policy through the setting of domestic interest rates. 

Just look at the US Federal Reserve for example of this and how everyone is obsessing over when the next interest rate cut will be. Yet the MAS actually does things a little differently and it uses the Singapore Dollar exchange rate as its main (monetary) weapon of choice.

To understand how the MAS impacts the Singapore Dollar and—by extension, you—we have to first get to grips with exactly how the central bank goes about implementing its policy.

 

Vibin’ with the S$NEER band

So, the S$NEER band isn’t a quirky five-person pop group like Maroon 5. No, unfortunately, it’s actually much less exciting. That’s because the MAS uses this “band” to manage the Singapore dollar’s strength and weakness against other currencies.

Let’s start from the top. The Singapore Dollar is managed against a basket of currencies of Singapore’s main trading partners and competitors–with each weighted based on the city state’s trade exposure to each of the currencies. The big, and some say contentious, point is that the MAS does not reveal publicly this basket of currencies that it’s managing the Singapore Dollar against.

This basket of undisclosed currencies is then lumped together into an index known as the Singapore Dollar nominal effective exchange rate, or “S$NEER” for short. The MAS then manages the currency by allowing it to float within an undisclosed policy “band” versus keeping it at a fixed value. This trading band–just like a rubber band–provides flexibility and can help the currency absorb short-term volatility in currency markets. 

 

Recent MAS decision

On 14 Oct, the MAS made a significant decision regarding its policy band—or rather, decided not to make one. The MAS convenes four times a year—likely more often than we catch up with our old school friends—to review whether adjustments to the slope, width, or level of its policy band are needed. These tweaks allow the MAS to manage the Singapore Dollar exchange rate, which in turn influences the city-state’s interest rate policy.

At this meeting, however, the MAS opted to leave its monetary policy unchanged. In simpler terms, the S$NEER policy band stayed as it was. This marked the sixth consecutive meeting where the MAS held steady—despite the reputation central bank meetings have for delivering high-stakes Drama (yes, with a capital D).

Alright, now that I’ve given you all the boring MAS policy background, you may be asking “Uh, so what does it actually mean for me?” Well, it comes down to quite a few things.

 

Main ways the MAS impacts you

Inflation: The struggle is real

The biggest way the whole S$NEER policy band impacts everyday people like us is that the central bank’s policy rate can help determine inflation. Rising prices–when at a healthy level–can actually be good for an economy. Yes, no one likes to see the price of Bak Chor Mee at our local hawker stall go up but inflation is a normal part of life.

Since we live on a tiny island, we import basically everything. As a result, Singapore is a super trade-dependent nation. With that, the local currency is pretty important (actually, crucial) in determining import prices of everything from TVs to beef. 

With a stronger S$NEER, the direct impact is lower import prices and, therefore, lower inflation. Of course, the reverse also works in that a weaker S$NEER results in slightly higher inflation. But, thankfully for us, inflation in Singapore has moderated somewhat and the MAS now projects that “core inflation” will decline to around 2% by the end of this year–great news for us!

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ALSO READ: The US Just Elected Trump As President: What Does It All Mean For Singapore Investors?

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Lower investment yields, people

Beyond that, there’s also the obvious knock-on effect of how the MAS influences the investment space. That impacts everyone as we all (hopefully!) are preparing for retirement by investing a portion of our monthly savings. With the S$NEER band having been kept steady for over a year now, the expectation of investors is that some point soon, the MAS will weaken the band.

That’s down to a number of factors, including the fact that inflation in Singapore is coming down but also that the US Fed, the world’s most influential central bank, is also cutting interest rates. Remember, financial markets tend to “price in” events that are set to take place in the near future. As a result, you see things reflected in financial markets before they actually take place.

With everyone expecting a weakening of the S$NEER band, the return you are getting on “safe” assets–like Singapore T-bills, Singapore Savings Bonds (SSBs) and Money Market Funds (MMFs)–have all come down. For example, the latest cut-off yield on the 1-year Singapore T-bill has fallen 2.71%, down from the 3.38% yield you could have got in July’s issuance of 1-year Singapore T-bills.

The same sort of thing is evident in the yields of SSBs, which have steadily fallen over the past 3-4 months and the latest SSB issue now gives investors an average annual yield of just 2.56% over 10 years, down significantly from the 3.33% you could have received as recently as May 2024.

 

Being aware of the MAS and economy

The MAS, like all central banks, take their cue from how the local economy is doing. With such a trade-dependent nation like Singapore, it’s also worth noting that the global economy’s health has a bigger impact on the Little Red Dot.

In that sense, we should be aware of how the S$NEER policy band operates but we don’t need to follow every tiny little detail. That’s because it’s more important to just understand what the investing environment is like. Given the stable S$NEER band, along with falling interest rates in the US, yields on those uber safe assets are coming down.

What does all that mean? It’s clear. More risky assets, like stocks, are seeing more money flow into them. We’ve already seen that with some juicy headlines of “record highs” in the S&P 500 Index–the key stock market index made up of large US companies. Furthermore, even speculative assets (like Bitcoin) have seen gains as people become less attracted to these falling returns in safe assets.

At the end of the day, don’t sweat it. It makes sense to continue investing the way we have always done, when thinking about the long term. However, with falling returns on safe assets, it’s always useful to know exactly how the MAS and its policy band really affect our investments in the short term. 

 

Found this article useful? Read other investment articles here.

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About the author

Tim Phillips has spent over 15 years in the finance industry as an investment communications specialist with the likes of Schroders, The Motley Fool, and CGS International. He’s passionate about helping people take control of their finances by building wealth through long-term investing and thinking more coherently on all things “money”. He loves breaking down complex financial topics into content that’s informative and, most importantly, engaging.

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