But past achievements will not extrapolate into future successes, unless we update our policies to meet changing conditions. Policies that worked in the 1970s and 1980s needed rethinking by the 1990s. In 1997, we began a comprehensive review of MAS’ policy framework and approach, which has led to fundamental changes. Our work is far from done, and we anticipate many challenges ahead. Credibility and dynamism – MAS’ approach to future challenges Monetary policy In monetary policy, certain verities are not likely to change. We will continue to manage the exchange rate as our principal policy variable. The primary objective will still be to maintain price stability and the purchasing power of the Singapore dollar, over the medium term. We will continue to guard against destabilising speculation in the Singapore dollar. However, the international environment has changed. We are witnessing larger capital flows and more volatile financial markets. G3 currencies have tended to undergo prolonged periods of misalignment, followed by sharp corrections. For a while after the Asian crisis, when currencies that were quasipegged to the US dollar collapsed in a disastrous contagion, a consensus was growing that the only sustainable exchange rate regimes for emerging markets are either a hard currency peg or a totally free float. 1  In 1973, we reduced the corporate tax for ACU interest earnings from overseas loans from 40% to 10%. We extended this to fees and commissions received by ACUs in 1976. BIS Review 67/2001  3  These corner solutions are not suitable for Singapore.
Economic activity in the third quarter is estimated to have increased by 0.4% compared with the previous quarter. In 2010 we expect to see a moderate recovery. This is in line with the latest Eurosystem staff projections, which were published last Thursday. However, this expectation remains surrounded by a high level of uncertainty. In the view of the Governing Council, the risks to the outlook remain broadly balanced. As regards price developments, inflation and inflationary pressures have remained low over recent months. In line with our expectations, inflation rates turned positive again in November, reaching an estimated 0.6%. Looking ahead, we expect inflation to remain moderate over the policy-relevant horizon, in line with a relatively slow recovery in demand. Indicators of inflation expectations over the medium to longer term remain firmly anchored, in line with the Governing Council’s aim of keeping inflation rates below, but close to, 2% over the medium term. Our monetary analysis confirms the assessment of low inflationary pressures over the medium term. In particular, we see that money and credit expansion continues to decelerate. In the case of loans to households, the latest data provide further confirmation of a levellingoff at low rates of growth. The growth of loans to enterprises follows turning-points in the business cycle with some lag. The still subdued levels of production and trade, coupled with broader uncertainty regarding the business outlook, will dampen firms’ demand for bank financing also in the coming months, especially for short-term loans.