Today, MAS adjusted the currency band upwards. Surprise?!!! Not really. In an open and small economy like Singapore, exchange rate policy is more effective in controlling inflation than any other mechanism. The authority has been monitoring the inflation numbers very closely especially after such spectacular growth in the past few quarters. So, when CPI keeps going up, they have to tighten the exchange rate policy.
Being a country with one of the highest saving rate in the world, it cannot afford to let inflation erode away the saving of the people. The increasing inflation rate is already creating a negative real interest rate environment that fuels inflating prices in the property and stock markets. If inflation were to be left uncontrolled, the savers will be severly punished. Like I have mentioned before, the nearly zero interest rate environment is not sustainable. The excess capacity that we have in the economy today will run out sooner or latter. Once that happens, inflation will come roaring back. Already at close to zero, interest rate has no other way but to go up.
