Singapore’s inflation rate increased from 2009 to 2013, with some economists calling for a ‘switch’ in Singapore’s monetary policy. Discuss the validity of this view.

Singapore’s inflation rate increased significantly from 2009 to 2013, with rising housing prices being one of the key contributors. This has sparked discussion between some economists with some calling for a ‘switch’ in Singapore’s monetary policy from one of managing exchange rates to that of managing interest rates.

Discuss the validity of this view. [25]


Monetary policy is a macroeconomic policy in which interest rates, within an economy, are changed to achieve certain macroeconomic objectives.

Exchange rate policy is a specific form of monetary policy in which exchange rates of a given currency are manipulated by the government to achieve certain macroeconomic objectives within the domestic economy.

 (RWA) Singapore has an extremely open economy, and has been using monetary policy centred around exchange rates, which is controlled by the MAS. Inflation in the economy in the recent years are increasingly due to domestic factors, which may justify the case for Singapore to switch to monetary policy centred around interest rates.


1.  Demand-pull inflation

·      Mostly due to exports-led growth due to the nature of Singapore’s economy being trade-reliant

·      Happens also because Singapore’s economy has been operating at full or near full employment level for the most of the last decade 

·      In recent years, the increase in demand of housing (largely due to increase in population, abundance of liquidity and low interest rates) has also increased inflation

2.  Imported inflation 

·      Due to heavy dependence on imports for survival (e.g. necessities like food, oil)

3.  Cost-push inflation      

·      Due to rise in labour costs (as a result of foreign labour tightening policies) and price of oil 


1.  One of the major causes of inflation was increased housing prices. 

·      One of the key reasons for this was low interest rates

·      Thus, increasing interest rates through an interest rate policy should be able to effectively reduce demand for housing.

2.  Private transport costs are also one of the reasons causing inflation today. 

·       Higher interest rates would discourage purchases of large ticket items like cars as well 

·       This should help to reduce demand for cars, which can lower COE bidding, effectively bringing down inflation.

(RWA) Limitations of the above arguments include the fact that cooling measures have already brought down / stabilised the housing market and housing prices are unlikely to be a significant factor causing further inflation. Furthermore, there were other factors like population growth causing increase in housing prices.



Exports-led growth is a key cause of inflation as mentioned in the earlier part of the essay. Exports are a key driver of the Singapore economy and maintaining control over our exchange rates may be more important in controlling inflation. 

·       (RWA) Interest rate policy targets C and I. In Singapore, domestic consumption is small due to the size of Singapore’s market. FDI in Singapore have support and funding from parent companies (MNCs) and are unlikely to be sensitive to interest rate changes.

·      Major problems may be brought about by giving up control over exchange rates, i.e. significant hot money inflows and outflows, which may bring about major fluctuations in the exchange rates (loss in investors’ confidence) and neither significant appreciation (loss in exports competitiveness) nor significant depreciation (increased imported and cost push inflation) is beneficial for the economy.



(RWA) The Global Financial Crisis has led to a low interest rate environment as a result of quantitative easing and loose monetary policy around the world by Central Banks. Since Singapore is an interest-rate taker, the low interest rate environment would have attracted investors to take a plunge into the property market leading to the higher property prices. However, the government has since implemented multiple rounds of cooling measures and have since been able to control the property prices where property prices declined from 2013-2017, showing that interest rates as a policy instrument is not necessary in order to bring down property prices. Given our heavy reliance on trade for growth and survival – it would make more sense for us to continue our approach of using exchange rates as a policy instrument for monetary policy.