If inflation two years ahead was expected to be lower than two per cent, this was a signal that the interest rate needed to be cut, and if it was expected to be higher, the rate needed to be raised. Of course, this rule could not capture all of the nuances in the monetary policy considerations, but it provided a rough explanation of the monetary policy decisions. However, there were also disadvantages. In normal cases it is not, for instance, particularly realistic that the policy rate would remain unchanged a couple of years ahead. The fact that the forecasts were based on this assumption made it difficult to assess our forecasts and to compare them with those of other forecasters. Nor was it easy to implement the assumption of a constant rate in a consistent manner in the forecasting process. These problems would have been aggravated when we extended our forecast horizon. The transition to the new interest rate assumption at the same time meant that the simple policy rule used to explain monetary policy had to be abandoned. This rule was easy to understand and was therefore a good educational tool: if the forecast of a constant repo rate showed inflation close to target the interest rate would be held unchanged. However, it gradually became clear that this rule could sometimes form an obstacle in our communication. It created an exaggerated focus on the current interest rate decision and on the inflation forecast exactly two years ahead.
In addition, to inject greater impetus for market participants to shift from SOR to SORA, MAS, together with the SC-STS, will outline guidance by October this year, on specific deadlines to cease the usage of SOR in new financial products. It is important to provide forward guidance on this matter, so that banks and endcustomers can move in a concerted way towards achieving a smooth transition. This ensures our financial system is well-prepared ahead of end-2021. The forward guidance also matters from a risk management point of view. With the end-2021 deadline approaching, it is not prudent for banks and end-customers to enter into new SOR contracts that mature beyond end-2021. Doing so only compounds the problem that banks and customers will eventually have to deal with. 19 Third, is the need to build a bridge of clear and effective communication between  banks and end-customers. MAS expects banks to engage customers in a clear, timely and transparent manner. This includes raising customer awareness and providing clear explanations on: the global move towards using overnight near risk-free rates, the shift to SORA in the SGD interest rate market, how this benchmark transition will impact them, and how customer spreads over the loan reference rate may have to be adjusted to account for the economic differences between SOR and SORA, given that SORA is an overnight rate that lacks a term and credit risk premium. 20 When engaging customers on benchmark transition, banks should take into account MAS’ Fair Dealing Guidelines.