Singaporean Inflation and Monetary Policy


Singapore is an island country located in southern Malaysia. Currently, it is one of the world’s most wealthy nations due to its status as a global financial center and its strong international trading links. Notably, the port of Singapore is one of the busiest across the globe regarding tonnage handled. Besides, the country’s per capita GDP is relatively equal to that of the leading nations of Western Europe. Again, the free market platform serves as one of the main drivers of Singapore’s economy. Further, Singapore “enjoys a remarkably open and corruption-free environment, stable prices, and a per capita GDP higher than that of most developed countries” (Central Intelligence Unit [CIA] n.pag). Mainly, its economy depends greatly on exports, especially of information technology products, medical and optical devices, consumer electronics, and pharmaceuticals. Besides, the economy of Singapore is highly supported by a vibrant business, financial, and transportation sectors.

Despite Singapore’s strong economy; however, the current trends of inflation rate (deflation) are worrisome (CIA n.pag; The World Bank). Considerably, this is because of inflation rate influences the main economic components such as production, consumption, and savings. In this regard, this case study reviews inflation in Singapore. Again, it evaluates the cost of inflation and the cost of reducing inflation in Singapore using relevant theories and models. Also, the case study evaluates Singapore’s monetary policy and fiscal policy and its effectiveness in achieving the inflation target.

Inflation Trends in Singapore

Over the past five years, Singapore has witnessed a significant decline in the inflation rate. Notably, the inflation rate has dropped from 5.3 percent in 2011 to -0.5 percent in 2015. The table below shows the inflation rates in Singapore in the last five years.

Year Inflation Rate (Percent)
2011 5.31
2012 4.51
2013 2.41
2014 1.01,2
2015 -0.52(deflation)

(CIA n.pag2; The World Bank n.pag1).

Notably, the current negative inflation rate in Singapore has been experienced for the last 12 months. However, Low notes that the core inflation, which measures daily domestic expenditures, has continued to rise on both education and food (Low par. 2). On the other hand, the consumer index, which is the measure of inflation, declined to 0.8 percent from one year ago. As such, this phenomenon has extended the longest stretch of deflation that the country has witnessed since 2009. The current session of negative inflation is mainly due to the decline of private transport and housing costs. Notably, the decline of both private transport and housing costs in October 2015 was biggest than United Overseas Bank Ltd (UOB) economists fall estimates of 0.4 percent (Low par. 6). October’s decline followed a September’s decline of consumer price index by 0.6 percent. Again, transport costs dropped by 1.7 percent, with utilities and housing declining by 4.3 percent in 2015.

According to Low, “core inflation measure, which strips out accommodation and private road transport costs, rose [to] 0.3 percent compared with October last year” (par. 8). Based on the Ministry of Trade and Industry (MTI), and MAS statement, this situation is mainly associated with lower costs witnessed in retail and oil-related items. Singapore’s service inflation did not change between September and October and stood at 0.8 percent. Notably, “MAS and MTI said that external sources of inflation are expected to stay “generally benign, given ample supply buffers in the major commodity markets and weak global demand conditions” (Low par. 11). Again, oil prices in the entire 2016 are anticipated to remain at low levels, which are projected to be US$54 per barrel or S$76.60 (Singapore dollars). At the local market, there will be persistence of wage cost pressure, but the restrained economic growth environment will suppress their transfer to consumer prices.

Cost of Inflation and the Cost in Reducing Inflation in Singapore

Deflation may cause numerous problems in the market. One problem is trying to transfer the increased cost-induced prices in the market characterized by very low inflation rates or deflation rates (Rosenbloom 80). Notably, in actual deflation (like in Singapore now) or low inflation rates, sectors of the economy, wholesaler, retailers, and manufacturers always face built-in cost pressures such as increased energy costs and particularly from labor contracts that were negotiated some years back when the inflation rate was significantly high. Usually, increasing prices to overcome cost pressures are difficult when a country is facing deflation because each member of the market channel is highly sensitive to increased prices. According to Rosenbloom, it is virtually impossible to pass the price increase to the next market channel up to the final buyer during the period of actual deflation (80).

The theoretical argument of a price-level target when an economy is in a deflationary environment is strong. However, there is another reason to adopt a price level target when the economy has experienced a persisted period of deflation together with a severe balance sheet problem, which prevents the financial systems of a country from working properly (Ito and Rose 173). Notably, non-performing loans weaken financial institution’s balance sheets, and as such, the lack of capital compels banks to reduce lending, especially for new investments. Consequently, financial systems are unable to allocate capital to productive investment opportunities, hence causing stagnation of the economy. Again, deflation also weakens balance sheets of companies whose debt increase in value in real terms, while the assets have not increased at the same rate (Ito and Rose 174). In this case, the loss of net worth implies that even firms at favorable investment opportunities cannot get funds at favorable rates because they are likely to engage in risky behaviors (moral hazard) due to the presence of fewer stakes in the firm.

Monetary Policy and Fiscal Policy Implemented In Singapore

Monetary Policy

Since 1981, Singapore’s monetary policy has been based on the exchange rate management (Monetary Authority of Singapore [MAS] Singapore’s Exchange n.pag). Specifically, the primary objective of the monetary policy has been to promote price stability as the foundation for sustainable economic growth. In Singapore’s open economy, the preferable intermediary target of monetary policy is the exchange rate. In particular, the government relies on direct interventions of international exchange markets to control the underlying conditions of Singapore’s economy. Through this control, there is a predictable and stable relationship between monetary policy and price stability as the final target of the policy in the medium term. Again, the management and valuation of the Singapore dollar (S$) are based on numerous currencies belonging to trade associates and rivals (MAS Singapore’s Exchange n.pag). Singapore assigns weight to such currencies based on their importance towards Singapore’s trading relations with the rest of the world. Periodically, Singapore revises basket composition to reflect changes in trade patterns.

Mainly, MAS embraces the floating regime for the Singapore currency. Notably, “the trade-weighted exchange rate is allowed to fluctuate within a policy band, the level and direction of which is announced semi-annually to the market” (MAS Singapore’s Exchange n.pag). Mainly, the policy band provides the instrument of accommodating short-term fluctuations in the foreign exchange markets as well as the flexibility of managing the exchange rate. Occasionally, Singapore appraises the exchange rate policy band to align it with prevailing economic forces. This periodical review assesses the path of the country’s exchange rate to avoid misalignment in the currency value (MAS Singapore’s Exchange n.pag). Particularly, a release of Monetary Policy Statement (MPS) of the review occurs once every six months, in which it provides recent information relating to the latest movements in the exchange rate and explaining the stance of exchange rate policy in the future.

Again, relying on the exchange rate the intermediary target of the country’s monetary policy means that the government financial institution (the MAS) surrenders its power and control on both Singapore’s money supply and interest rates. (MAS Singapore’s Exchange n.pag). In the aspects of free capital movements, Singapore’s interest rates are mainly determined by the foreign exchange rate and investor expectations of the future movements of the country’s currency. Singapore’s interest rates have been lower than in the US; as such, they mirror market prospects of Singapore’s dollar appreciation in the due course.

Fiscal Policy

In Singapore, the authorities rely on a strict approach to its fiscal policy. Usually, the fiscal policy of Singapore focuses on promoting long-term economic growth instead of cyclical adjustment or income distribution (MAS Fiscal Policy par. 4). To achieve the goal mentioned above, the private sector is considered as the primary engine of growth, while the government provides a stable and conducive milieu for it to thrive. Again, the government ensures that expenditures and tax policies are justified based on microeconomics grounds, and they mainly focus on supply-side aspects such as incentives for investment, enterprise, and savings (MAS Fiscal Policy par. 6). Further, the counter-cyclical function of fiscal policy is constrained because of high import leakages. Notably, the government has continuously maintained a balanced budget, which has enabled the country to attain modest budget surpluses and at the same time build reserves over the years (Loong et al. 77). Again, the government has avoided deficit spending and government borrowing.

Singapore has maintained a lean government by directing expenditures on essential goods. Statistically, government spending has been kept below 20 percent of the GDP (Loong et al. 77). Mainly, the lean government approach has minimized the overall burden on the economy. Besides, it has enabled the government to reduce tax rates progressively. The key areas of public expenditure include public housing, health care, education, and national security. The government of Singapore is committed to delivering essential goods and services, and at the same time building and maintaining excellent economic infrastructures. Notably, the development expenditure constituted about one-third of government spending in the last 30 years (MAS Fiscal Policy par. 1). Overall, Singapore pursues lean government as possible by spending what it only needs and containing expenditures at the lowest achievable level.

Effectiveness of Monetary Policy and Fiscal Policy in Achieving the Inflation Target

Both monetary policy and fiscal policy are not effective in achieving the inflation target. Mainly, monetary policy and fiscal policy of Singapore’s goal are to promote a healthy economy; however, the country is experiencing deflation, which threatens the stability of the economy and the society in the long term. In particular, deflation makes households and firms highly risk-averse because of the devaluation of assets they hold (Okubo 56). The lack of ability to reduce real interest rates towards zero impedes monetary policy. Specifically, firms and households with outstanding debt suffer from the real increase in the debt burden.

Regarding cutting prices, Singapore’s households are likely to postpone consumption while firms are likely to become cautious in their related investment decisions due to the increase in real interest rates if deflation persists. Again, greater uncertainty relating to the future of economic performance and undervaluation of the market capitalization of firms in the stock market associated with deflation will adversely affect opinion towards doing business in Singapore. Further, the current deflation is likely to suppress risk-taking activities that are essential for innovation and shrink the economy; hence, deprive youth job opportunities (Okubo 57). Despite monetary policy and fiscal policy working towards promoting investment, the current deflation is likely to shift investments to other countries. Overall, the Monetary Authority of Singapore (MAS) and the Ministry of Finance monetary policy and fiscal policy are not effective in achieving the inflation target, as the phenomenon has shifted to deflation.


As an important international trading link and global financial hub, Singapore is one of the wealthiest countries in the world. This case study has reviewed Singapore’s inflation rate, its costs, and the effectiveness of monetary policy and fiscal policy in achieving the inflation target. In the last five years, Singapore has witnessed a persistent decline in the inflation rate from positive to negative (deflation). In particular, inflation fell from 5.3 percent in 2011 to -0.5 percent (deflation) in 2015. Mainly, the deflation rate is associated with the decline of housing costs, and private costs. Despite the deflation rates, Singapore’s core inflation, which gauges daily household expenses, increased education, and food. Numerous costs are associated with deflation such as increased costs and labor contracts that were negotiated years back when inflation was high. Mainly, it is hard to raise prices to overcome cost pressures because markets are highly sensitive to price changes. As such, it is extremely hard to transfer price increase from sectors of the economy, wholesaler, retailers, and manufacturers to final buyers

The monetary policy of Singapore is based on exchange rate management. Mainly, this monetary policy promotes price stability as the basis of sustainable economic growth. In particular, direct interventions control the foreign exchange rate and maintain a stable and predictable relationship with price stability. On fiscal policy, the government has maintained a balanced budget that aims at achieving budget surpluses and building reserves. Again, Singapore has maintained a lean government. Notably, the government is committed to spending its revenue on essential goods and services such as public housing, health care, education, and national security. Although both fiscal policy and monetary policy pursue economic prosperity in Singapore, it is evident that they are not effective in achieving the inflation target. The shift from a positive inflation rate to the negative inflation rate (deflation) is detrimental to the economy of Singapore due to the decline of consumption and investment.

Works Cited

Central Intelligence Unit (CIA) 2016, “East and Southeast Asia: Singapore”. The World Factbook. Web.

Ito, Takatoshi, and Andrew K. Rose. Monetary Policy with Very Low Inflation in the Pacific Rim. Chicago, Illinois: University of Chicago Press. Print.

Loong, Lee Hsien et al. “Fiscal and Monetary Policy.” The Road Thus Far. Singapore, Singapore: Ministry of Trade and Industry, 2003. 72-87. Print.

Low, Aaron. “Singapore Consumer Prices Down 0.8% in October, but Core Inflation up 0.3%.” The Straits Times, 2016. Web.

Monetary Authority of Singapore (MAS) 2016, “Fiscal Policy”. Monetary Authority of Singapore (MAS) Online. Web.

—, Singapore’s Exchange Rate-based Monetary Policy. PDF file. Web.Okubo, Yoshio. “Overcoming Deflation and Moving Forward.” Think Tank 20: The G-20 and Central Banks in the New World of Unconventional Monetary Policy, 55-60. Print.

Rosenbloom, Bert. Marketing Channels: A Management View. 8th ed. 2012. Mason, Ohio: Cengage Learning. Print.

The World Bank 2016, “Inflation, Consumer Prices (annual %)”. The World Bank Online. Web.

Find out your order's cost