IMF's advice on Singapore's monetary policy

The International Monetary Fund (IMF) recently commented on the relevance of Singapore's monetary policy (which will be covered in Topic 17 and 18)

The full article is below:

Sep 1, 2009
Keep monetary policy: IMF
WASHINGTON - THE International Monetary Fund (IMF) on Monday urged Singapore to keep monetary policy at current levels until the economy was clearly out of recession and on a healthier path.

In its annual review of Singapore's economy, the IMF said current monetary policy settings were 'broadly appropriate' and supportive of domestic demand without undermining exchange rate stability.

'The focus now is to preserve financial stability and to ensure that Singapore is well positioned to rebound once the global economy recovers, taking advantage of the ample room for maneuver at the authorities' disposal,' the IMF said. 'Further along the recovery path, a tightening stance would be warranted to safeguard price stability, through targeting a trend appreciation of the nominal effective exchange rate,' it added.

Singapore's central bank manages monetary policy by adjusting the Singapore dollar against a secret basket of trade-weighted currencies. In April, it shifted the midpoint of the trading band lower. Its next review of monetary policy is in October when many analysts believe the central bank will keep its accommodative monetary policy despite stronger-than-expected economic performance in the second quarter.

It said Singapore's economy would likely contract by about 8 per cent in 2009, with the trough in gross domestic product probably occurring in the fourth quarter. GDP should reach about 2.5 per cent next year, the IMF added. An IMF staff document noted that the authorities believe growth in 2010 could be stronger given signs of resilience in intra-regional trade and in advanced economies.

The Fund said staff assessment of the value of the Singapore dollar showed the currency 'appears to be somewhat weaker than its medium-term equilibrium level' but should recover once the world economy rebounds. 'The real effective exchange rate would likely strengthen, in line with fundamentals, once a global recovery takes hold,' the IMF added.

IMF staff documents said the government believes the Singapore dollar was broadly in line with its fair value. It added, 'Staff and authorities agreed that unusual uncertainty clouds these assessments.'

The IMF said the large fiscal stimulus provided by Singapore's government in January should help limit damage from the recession on households and businesses. It also welcomed the authorities' readiness to take further stimulus measures should the economic rebound prove weaker than currently expected.

'Over the medium term, fiscal policy will need to play a part in preparing the economy for shifts in the pattern of global demand,' IMF said, also calling for higher public investment in infrastructure and more flexible labor and product markets.

In addition, the IMF said Singapore should continue rigorous stress-testing of its financial system to shore up confidence in the sector.

IMF staff documents noted there was broad consensus that credit quality will deteriorate in the near term as the recession drags on although at present these pressures looked manageable. -- THOMSON REUTERS