How does monetary policy steer your investments?
Monetary policy can influence a country’s rate of economic growth, employment, inflation, and currency exchange rates.
If an economy is facing a downturn, the nation’s central bank would attempt to increase production, jobs, and consumer demand by cutting interest rates. This works to reduce the cost of credit and potentially increase the supply of money in circulation.
Conversely, if there is runaway inflation, asset price spikes, or excessive lending taking place, policymakers will attempt to introduce demand. This will be done by moderating measures to restore economic and financial stability.
In Singapore, monetary and exchange rate policy is conducted by the Monetary Authority of Singapore (MAS).
How does monetary policy work?
Singapore’s monetary policy measures during COVID-19
MAS pursues its monetary policy by managing the Singapore dollar’s exchange rate against a basket of currencies. As stated in its charter, it does this to maintain price stability conducive to sustained economic growth. Why does the MAS focus on the exchange rate instead of the interest rate like most central banks? It’s because within Singapore’s small and open economy, exchange rate is the more effective tool for maintaining price stability.
Beyond its typical policy action, MAS takes a wider range of steps from time to time. For instance, it announced measures to help ease the COVID-19-induced financial strain on individuals and SMEs in 2021.
How does monetary policy impact investments?
The policies alter the supply of money in circulation and influence interest rates, affecting consumer and business confidence and their spending and investment decisions.
Key pitfalls of monetary policy
The policy’s effectiveness could potentially be compromised due to:
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