MAS dollar policy: More frequent updates needed?

Some observers think MAS should switch to more frequent policy statements than its

current six-monthly cycle to update markets. But the benefits of this have to be weighed

against the costs of having too short-term an outlook on monetary policy.

ST Illustration : Adam Lee

THE Monetary Authority of Singapore's (MAS) regular policy statements are always scrutinised but few have generated as much speculation as its latest announcement this month.

Before the statement was released on April 14, economists were divided as to the likely direction of monetary policy and debated whether the MAS should have more frequent meetings to calibrate policy in an increasingly volatile world.

The speculation started after the MAS made a surprise change to its policy in January - acting months ahead of its scheduled meeting. It surprised observers with a move to ease the rise of the Singapore dollar.

The decision to move in January was almost unprecedented.

The central bank usually meets twice a year, in April and October, and releases statements setting the tone for how the currency will perform in the coming months.

In recent years, the only other occasion it made this "off-cycle" change was after the Sept 11 attacks in 2001.

In October that year, the MAS announced that it would widen the policy band within which the Singapore dollar is allowed to fluctuate to allow greater flexibility in managing the exchange rate.

At the time, the central bank conducted its regular policy reviews in January and July.

The move in January this year, the MAS explained, was prompted by the oil price plunge, which dampened inflation and reduced the need for a strong Singapore dollar to keep the cost of imports down.

January's surprise policy shift sparked heated discussion among economists over whether there would be more such easing on the cards; in other words, if the MAS, at its scheduled April meeting, would allow the Singapore dollar to weaken even further, given unexciting economic growth numbers - around 2.1 per cent in the first quarter - and low, or even negative, inflation in some months.

But the central bank managed to take the markets by surprise once more by not making any changes.

The MAS announced that it would maintain its stance of a modest and gradual appreciation of the Singapore dollar, signalling a more upbeat economic outlook for the Republic.

More meetings, more volatility, more costs?

THERE have been calls among some economists for the central bank to increase the frequency of its meetings and statements.

The rationale is that this will allow the MAS to respond more nimbly to what is set to be a volatile year and keep the market better informed of its intentions.

Some economists pointed out that the MAS meets relatively infrequently, compared with its counterparts in the region and around the world.

For instance, Malaysia's central bank meets every two months, while Indonesian central bankers have monthly meetings. The United States Federal Reserve holds eight policy meetings a year, while the Bank of Japan conducts 14 reviews. These meetings are always followed by a public statement on monetary policy.

Credit Suisse economist Michael Wan wrote early this month that more frequent meetings would help the MAS take into account the increasingly uncertain macroeconomic outlook and rising market volatility.

Finance Minister Tharman Shanmugaratnam's comments largely put those concerns to rest last week. He said Singapore is sticking to its biannual monetary policy reviews.

Singapore's central bank uses the exchange rate as its main tool to strike a balance between controlling inflation from overseas and laying the foundations for economic growth.

Most other central banks use interest rates as a monetary policy tool.

The MAS manages the exchange rate against a basket of currencies of Singapore's major trading partners.

The exchange rate is allowed to float within a policy band that the MAS can adjust when it reviews monetary policy.

A stronger currency helps counter inflation by making imports cheaper in Singapore dollar terms, while a weaker dollar helps exporters, whose goods become cheaper in foreign markets.

More frequent policy reviews "will lead to too much uncertainty, too much front-running each time people anticipate a change, and the uncertainty isn't going to help the markets or the economy", said Mr Tharman, who is also Deputy Prime Minister.

Monetary policy also works with a lag effect, meaning that the MAS has to take a medium-term view on its moves and not react to every minor development, he added.

Indeed, the likely increase in exchange rate volatility that will accompany more frequent policy meetings may be too high a price to pay for keeping financial markets updated about the central bank's forecasts.

UOB economist Francis Tan said that while more frequent meetings will give the central bank greater flexibility in making changes, it may also encourage speculation about the direction of its policies in the run-up to each meeting and result in increased financial market volatility.

"Traders will be taking positions based on their predictions of what the central bank might do, and increasing the number of meetings will give them more opportunities to do so," Mr Tan said.

This will result in greater volatility in the Singapore dollar exchange rate and push up foreign exchange hedging costs for companies, said Barclays economist Leong Wai Ho.

Credit Suisse's Mr Wan, who had been among the economists calling for more frequent meetings, said he "can see where the minister is coming from".

Still, "if the economy does not pan out as the central bank expects, moving into its next meeting in October, the market might start to price for a high probability of a meeting before October", he noted.

Mr Wan added that it "will be good to have more meetings", though this will have to be weighed against the costs of doing so.

Short term versus medium term

SOME economists have also argued that more information about the central bank's intentions and forecasts can be useful in periods of heightened volatility.

But even though the MAS can formulate policy with a view to preparing Singapore for known risks, such as the potential impact of the impending hike in United States interest rates, in the event of a major, unpredictable shock, the MAS will still have to make off-cycle policy adjustments to protect price stability, regardless of the frequency of its regular meetings.

Said Barclays' Mr Leong: "Every central bank retains the option to change settings when conditions change suddenly and unexpectedly.

"The Sept 11 attacks, the Lehman crisis, the recent rapid oil price plunge are events that can warrant a sudden reappraisal of settings. This flexibility should suffice."

Barring a major shock, the MAS' forecasts are also unlikely to change drastically from month to month or even quarterly, given that it has a much longer policy horizon.

Mr Tharman emphasised in his comments that monetary policy is focused on the medium term because there is usually a long lag between implementation and the policy having an effect.

"Our time horizon when we think through the implications of exchange rate policy is basically two to three years. It is not about the next six months. It is a two- to three-year perspective.

"And the reason is that there are long lags between the changes in exchange rates and actual inflation and growth.

"So, it is not a good idea to revise our policy often because it takes a long time to have an effect to begin with," he said.

The MAS should not be responding to or even seeking to reassure the market over every short-term blip.

Its monetary policy meetings and statements have longer-term goals, and should remain so.

Ultimately, the frequency of the central bank's policy reviews is less important than its ability to be alert to changes and make the appropriate adjustments.

However, only time will tell if changes to the MAS' existing framework will eventually be needed.

The Straits Times / Opinion Published on Tuesday, 28 April 2015

By Chia Yan Min chiaym@sph.com.sg