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.
Monetary policy: containing inflation in a restructuring economy Let me start with monetary policy framework. I will cover two areas: •  First, the continued relevance of the exchange rate in our monetary policy framework. •  Second, the calibration of monetary policy responses within this framework. Relevance of exchange rate as the instrument of monetary policy MAS’ exchange rate-centred monetary policy framework was formalised in the early 1980s. While other central banks sought to control money supply or interest rates, MAS has chosen to focus instead on the exchange rate as its monetary policy tool to keep inflation in check. The exchange rate-centred framework has served Singapore very well for over three decades. As I mentioned earlier, Singapore has had one of the best inflation records in the world despite enjoying one of the fastest rates of economic growth. BIS central bankers’ speeches  3  Let us quickly recall why the exchange rate is MAS’ chosen tool of monetary policy. Singapore is a small and extremely open economy. Total exports and imports of goods are each well in excess of 100% of GDP. •  Imports make up 40% of domestic consumption; the exchange rate is thus a powerful tool to moderate the impact of foreign price changes on domestic inflation. •  Exports are the chief driver of economic growth; and the exchange rate, as a key factor affecting export demand, is thus also an effective means for managing aggregate demand and hence overall inflationary pressures.