Why Singapore’s Central Bank Has No Key Rate

Singapore monetary policy can sound a little back-to-front. While for most countries tighter policy equates to higher borrowing costs, it’s not necessarily the case for the Asian city-state, where interest rates can rise when the central bank is loosening policy. That’s because the Monetary Authority of Singapore uses the exchange rate -- not interest rates -- as its main policy tool in its biannual reviews in April and October.

Because Singapore is a small (population 5.6 million) open economy that’s heavily dependent on trade. The currency affects inflation more sharply than in other countries, so targeting the exchange rate rather than interest rates is more effective for achieving price stability -- the central bank’s main goal. Added to that, the exchange rate is relatively easy to control through direct market interventions (ie the central bank buying and selling the Singapore dollar) and has a steady, predictable relationship with price stability.