Singapore has not been spared the effects of these broader global developments. Our exchange rate-centred monetary policy has been remarkably successful over the decades, in securing price stability amidst rapid economic growth and an open trade and capital account. Consumer price inflation has averaged 1.3% per annum during 1985–2005, one of the lowest in the world. Inflation surged briefly in 2008, moderated in the wake of the Global Financial Crisis, but resumed an upward creep from 2010 onwards. Consumer price inflation averaged 4.2% during 2010–2012, the longest period of sustained inflation above 4% in Singapore’s history. It is particularly challenging that the current bout of inflation is occurring against the backdrop of a slowing economy, weighed down by weak external demand and a tight domestic labour market. And in a world awash with liquidity searching for both yield and safety, Singapore has been at the receiving end of such flows. Tonight, I will set out MAS’ policy approach to securing price and financial stability, in this “new normal” of an economy restructuring amidst a global environment of slow growth and easy money. In most respects, this approach builds on the existing framework for monetary policy; but in other respects, it takes a more comprehensive view of macro stability and signifies the need for policy innovation in dealing with new realities. Let me begin by describing the external and domestic context within which MAS is currently operating. External context: surging liquidity, diverging leverage First, the global backdrop.
BIS central bankers’ speeches  1  Monetary policy in the advanced economies has been extraordinarily loose for a prolonged period of time. It has been unconventional in three important regards. •  First, short-term interest rates are at or close to the zero bound – and have been so for over four years now. •  Second, central banks are purchasing non-traditional assets in large quantities to exert downward pressure on long-term interest rates. This has been going on for close to five years now, with central bank balance sheets in the US and the UK, for example, ballooning to more than three times their pre-crisis levels. •  Third, central banks are providing “forward guidance”, either in the form of commitments not to raise interest rates until certain real economy thresholds are met or plans to expand the monetary base until an inflation target is reached, helping to extend expectations of easy monetary conditions. The overall impact of these measures has been to reduce tail risks in the advanced economies and prevent a sharp deceleration in growth. But they have been less successful in restoring economic growth to pre-crisis trend rates, in the face of deleveraging pressures. Debt-to-GDP ratios in the G3 economies must normalise at lower levels to restore macroeconomic and financial stability. This necessitates a decline in consumption. Banks are less willing to lend, and the private sector less willing to borrow. The relationship between liquidity and credit appears to have broken down.