How is MAS’ monetary policy implemented?

The Monetary and Domestic Markets Management Department (MDD) of MAS is responsible for monetary policy implementation.

This means ensuring that the Singapore Dollar Nominal Effective Exchange Rate (S$NEER)—which is MAS’ intermediate target of monetary policy—is kept within the boundaries of the policy band.

MDD’s primary tool for managing the S$NEER is intervention operations in the spot foreign exchange (FX) market.

MDD conducts FX intervention operations involving the sale or purchase of US$ against the S$ to ensure that the S$NEER is kept within the policy band, and is consistent with domestic price stability. S$-US$ intervention is the preferred operation since this is by far the most liquid S$ currency pair traded.

MAS’ intervention operations are thus akin to interest rate-targeting central banks’ monetary policy operations. Instead of using money market operations to achieve a targeted policy rate, MDD uses FX intervention operations to ensure that the S$NEER stays within the policy band.

Under both exchange rate and interest rate regimes, monetary policy operations lead to changes in the central bank’s balance sheet. For example, the selling of US$ to strengthen the S$NEER will have the effect of reducing OFR on the asset side of MAS’ balance sheet, which is matched by a reduction in banks’ cash balances with the MAS on the liabilities side.

This is akin to a central bank that targets a higher interest rate by selling domestic currency-denominated securities and thereby reducing the asset side of its balance sheet, matched by a reduction in banks’ cash balances with the central bank on the liabilities side. In the process of monetary policy implementation, MAS accumulates or expends Official Foreign Reserves (OFR) leading to changes in the size of MAS’ balance sheet.

https://www.mas.gov.sg/statistics/reserve-statistics/official-foreign-reserves

　Jul 2022