What this lesson teaches
I can explain fiscal, monetary and supply-side policy and judge how well each works.
Syllabus 8843, 3.2.3(b). Macroeconomic Policies: Policy measures and their effectiveness in achieving macroeconomic objectives:; Fiscal policy - How discretionary fiscal policy can influence the level of economic activities and living standards through government spending and taxation; Supply-side policies - How supply-side policies can improve quantity, quality and mobility of factors of production to increase the productive capacity of an economy and hence affect living standards; Monetary policy - How monetary policy can influence the level of economic activities and living standards through the management of exchange rates (case of Singapore) and interest rates
Make a guess
In April 2026 world energy prices jumped, and MAS raised the slope of its policy band slightly. What was MAS aiming for?
- A weaker S$, so exporters could absorb their higher energy bills.
- A slightly faster rise in the S$, so imported energy costs fewer S$.
- A one-off jump in the S$, then a steady rate from there.
Show the answer
A slightly faster rise in the S$, so imported energy costs fewer S$.
The slope is the rate of appreciation. A steeper slope makes the S$ rise faster, which offsets part of the higher foreign price of imports.
MAS manages the Singapore dollar against a basket of currencies within a policy band to keep prices stable.
MAS manages the Singapore dollar nominal effective exchange rate (S$NEER): the value of the S$ against a trade-weighted basket of its main trading partners' currencies.
The S$NEER is kept within a policy band. The slope of the band sets the rate of appreciation, the centre sets its level, and the width sets how much it can move. MAS adjusts these to keep medium-term prices stable.
MAS keeps the S$ within the band by buying or selling S$ in the foreign exchange market. Buying S$ raises demand for it, so its price rises.
Singapore uses the exchange rate because its trade is several times its GDP, so the exchange rate has a big effect on prices. Interest rates largely follow global rates, because capital flows in and out freely. This is the impossible trinity, or trilemma: no country can manage its exchange rate, allow free capital flows and set its own interest rates all at once. Singapore keeps the first two and gives up the third.
MAS reviews the band four times a year and moves the slope with the inflation outlook. In 2025, as inflation eased, it reduced the slope twice. It left policy unchanged in January 2026.
In April 2026 MAS raised the slope slightly, its first tightening since 2022. Shipping through the Strait of Hormuz had been disrupted since late February, so the prices Singapore pays for imported oil, gas and fuel rose sharply. In July 2026 it raised the slope again, very slightly, because growth was strong and higher import costs were spreading to consumer prices.
- Instrument
- S$NEER within a policy band.
- Band
- Slope, centre and width.
- Why
- Very open economy; rates follow global rates.
- Trilemma
- Managed exchange rate + free capital flows, so no independent interest rate.
Worked example: From easing in 2025 to tightening in 2026
In 2025, MAS reduced the slope of its policy band twice but kept it positive. In April and July 2026 it raised the slope. The centre and width were unchanged throughout.
- 2025: a smaller positive slope means the S$ still appreciates, but more slowly. This is easing, not a depreciation.
- 2026: a steeper slope means the S$ appreciates faster, so imported oil, gas and food cost fewer S$. This is tightening.
- Each change alters the rate of appreciation. The S$ was expected to keep rising throughout, faster or slower.
Watch out for this
When MAS reduces the slope, the Singapore dollar falls in value.
If the slope stays positive, the S$ keeps appreciating, just more slowly.
Check your understanding
Why does MAS use the exchange rate instead of interest rates?
- Trade is huge relative to GDP, and interest rates follow global rates anyway.
- Interest rates would work faster, but a stronger S$ would spare exporters.
- MAS fixes the S$ at one value, so it has no need for interest rates.
Show the answer
Trade is huge relative to GDP, and interest rates follow global rates anyway.
Right. The exchange rate is the more powerful and controllable tool for Singapore.