Introduction
Price stability is a key macroeconomic objective because it underpins sustainable growth, investor confidence and the protection of consumers' purchasing power. It typically refers to a low and stable inflation rate, usually targeted around 2%. In Singapore's current climate, where global inflationary pressures have emerged from pandemic-induced supply chain disruptions and rising energy costs, managing inflation has become especially pressing. The Monetary Authority of Singapore has responded by tightening monetary policy, allowing a modest and gradual appreciation of the Singapore dollar to mitigate these threats.
The consequences of not achieving price stability
Allowing inflation to persist above 2%, such as the 6% rate Singapore experienced in 2022, poses serious risks. High inflation erodes the purchasing power of consumers, so the same income buys fewer goods and services. This can severely affect the material standard of living, especially for lower and middle-income households who spend a larger proportion of income on necessities such as food, housing and transport. In an uncertain post-pandemic environment, rising costs can intensify anxiety and reduce consumer confidence.
High inflation can also undermine Singapore's export competitiveness. If domestic inflation is higher relative to trading partners, the prices of its goods and services in foreign markets become less attractive, potentially reducing export demand and harming the balance of trade and, in the longer term, GDP growth and employment in export-oriented sectors. As a small, open economy dependent on trade and imports, Singapore must guard against inflation spiralling out of control.
Trade-offs involved in maintaining price stability
To control inflation, MAS manages the exchange rate by allowing modest and gradual appreciation. A stronger SGD makes imported goods, including necessities like food and energy, cheaper in local currency terms, directly reducing imported inflation. It also reduces the cost of imported raw materials and intermediate inputs, lowering production costs and shifting short-run aggregate supply rightward, easing cost-push inflation. In addition, a stronger SGD makes exports more expensive in foreign currency terms, reducing net exports and aggregate demand, thereby dampening demand-pull inflation.
However, this comes at a cost. A decline in net exports from a stronger SGD can contract aggregate demand, reducing real national income and potentially leading to slower growth or recession. As firms receive fewer orders they may scale down production and hiring, raising unemployment. The fall in exports could also worsen the balance of trade and, by extension, the balance of payments. These trade-offs are particularly sensitive in the current climate, since Singapore's recovery remains uneven across sectors, with travel and hospitality still lagging. The decision to prioritise inflation control via appreciation must therefore be weighed carefully against the risk of derailing a fragile recovery.
Balancing price stability with other objectives
While price stability is crucial, it should not be pursued entirely at the expense of sustained growth and low unemployment. In a recovery phase the government should adopt a multi-pronged approach for long-term resilience. To support both price stability and growth, the government can complement MAS's exchange rate policy with supply-side policies. Providing grants and subsidies for firms to adopt automation, invest in research and development, or retrain workers raises productivity. As productivity rises, the long-run aggregate supply curve shifts rightward, increasing real output while reducing inflationary pressures, achieving the dual objective of higher growth and lower inflation. Such policies can also stimulate investment by lowering production costs, encouraging firms to expand and lifting real national income and employment without stoking inflation.
Evaluative conclusion: a dynamic policy stance is needed
While price stability is undoubtedly a priority, especially given elevated inflation in 2022, it should not be pursued in isolation. MAS is right to respond to imported inflation by allowing the SGD to appreciate. However, policymakers must remain vigilant. Should inflationary pressures ease, or should global conditions worsen, such as a recession in major trading partners like the United States, Singapore may need to shift toward a more accommodative stance, including pausing appreciation to support growth and employment. A dynamic, conditional stance, rather than rigid precedence for price stability, best serves Singapore's current circumstances.