Singapore Central Bank’s Exchange Rate Policy Explained: Why MAS Uses the S$NEER Instead of Interest Rates

Singapore’s central bank surprised markets on Monday by tightening its monetary policy, citing expectations that inflation will strengthen in the coming months. Unlike most central banks that adjust benchmark interest rates, the Monetary Authority of Singapore (MAS) manages monetary policy by guiding the exchange rate of the Singapore dollar.

The MAS uses the Singapore dollar nominal effective exchange rate (S$NEER), a trade-weighted index that measures the local currency against those of Singapore’s major trading partners. Instead of targeting a fixed exchange rate, the central bank allows the S$NEER to fluctuate within a confidential policy band. If the currency moves beyond that range, MAS intervenes by buying or selling Singapore dollars to keep it within the desired limits.

This exchange rate-based approach reflects Singapore’s status as one of the world’s most open and trade-dependent economies. Combined exports and imports are more than three times the country’s gross domestic product (GDP), while nearly 40 cents of every Singapore dollar spent domestically goes toward imported goods and services. As a result, currency movements have a greater impact on inflation than changes in domestic interest rates. A stronger Singapore dollar helps lower the cost of imports, easing inflationary pressures for businesses and consumers.

The MAS manages the S$NEER through three key policy settings: the slope, the level, and the width of the policy band. Adjusting the slope changes the pace at which the Singapore dollar appreciates or depreciates over time. Shifting the level, or midpoint, of the band produces an immediate strengthening or weakening of the currency and is typically reserved for major economic events such as recessions. Changing the width of the band allows the exchange rate to move within a broader or narrower range, influencing currency volatility.

Until 2024, MAS reviewed its policy settings twice a year, usually in April and October, while retaining the flexibility to make off-cycle changes during extraordinary circumstances, such as the inflation surge in 2022. Beginning in 2024, the central bank adopted quarterly monetary policy announcements, enabling more frequent assessments of Singapore’s economic outlook and inflation risks while responding more quickly to evolving market conditions.