Domestic Liquidity Conditions and Monetary Policy in Singapore

Abstract

Singapore has an unusual exchange rate-centred monetary policy framework that has served the economy well over the past decades. Monetary policy operations are carried out by the central bank through the management of the Singapore dollar against a currency basket. As is well recognised, such foreign exchange interventions do have an impact on domestic liquidity conditions. However, in the case of Singapore, this tends to be counteracted by the liquidity impact of public sector operations related to the fiscal position and the national pension scheme. The central bank takes into account the net liquidity impact of these and other autonomous money market factors as well as banks’ demand for funds when performing money market operations to regulate the amount of domestic liquidity in the financial system. We conclude with an explanation of the negligible liquidity impact of currency in circulation as reflecting Singapore’s gradual transformation towards a cashless society.