Against the backdrop of a weaker external economic environment and a more protracted global electronics downturn, near term growth prospects for the Singapore economy have turned significantly weaker while inflationary pressures are subsiding. The slowdown reflects a decline in demand, not an erosion of competitiveness. There is no reason for any persistent weakening of the Singapore dollar. MAS has therefore shifted to a neutral exchange rate policy stance, with a policy band centred on a zero percent appreciation of the $ MAS will continue to guide the $ within this exchange rate band, and stands ready to intervene to dampen excessive volatility should this become necessary. 3  Financial sector supervision and development  MAS' financial sector policies seek to promote a sound and resilient financial system while facilitating innovation, dynamism and competition. Recent and ongoing initiatives by the MAS have focused on: ·  harmonising regulation across the financial sector;  ·  liberalising access to the domestic industry;  ·  promoting corporate governance and market discipline;  ·  implementing a risk-focused supervisory framework; and  ·  developing talent in the financial sector. Harmonising regulation Convergence of financial activities and consolidation of financial institutions have made a more harmonised and integrated approach to regulation more urgent. Consistent regulatory treatment for similar products and activities will help level the playing field; it will also lower compliance costs by streamlining relevant regulations and reporting requirements across activities. As an integrated regulator, MAS has made significant progress in harmonising regulation.
The key policy rate influences interest rates on interbank loans. Banks’ deposit and lending rates and bond yields depend on the current key policy rate and expectations as to future changes in this rate. Lending rates in state banks are also linked to the interest rate on interbank loans and bond yields. The aim of preventing inflation expectations from becoming entrenched below the operational target of 2.5 per cent was one of the main reasons the interest rate was lowered to a very low level in 2003 and 2004, when inflation receded and approached zero. Low interest rates have stimulated demand and output and gradually led to the prospect of higher inflation, which we are addressing by increasing the interest rate. The labour market is an important factor in how the interest rate functions. A rise in the interest rate curbs aggregate demand for goods, services and labour, and eases the pressure on wages and prices. These effects are amplified by the impact of the interest rate on the krone exchange rate. Higher interest rates contribute in isolation to krone appreciation and to lower profitability in the internationally exposed sector. This can result in lower employment and wage growth in this sector. Expectations with regard to price developments  2  BIS Review 139/2007  also influence wage demands and have an effect when companies adjust their prices. The inflation target can provide an anchor for these expectations.