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Rising oil prices have rekindled inflation risk in Singapore, and the Monetary Authority of Singapore has responded by tightening monetary policy.
The mechanism it uses is one that most central bank watchers would not recognize immediately: the MAS manages medium-term price stability through the Singapore dollar exchange rate, not through borrowing costs.
The exchange rate as the instrument The MAS controls the Singapore dollar against a trade-weighted basket of currencies. When it tightens, it adjusts that arrangement to allow the currency to strengthen.
A stronger Singapore dollar reduces the local-currency cost of imports, which bears directly on inflation arriving through traded goods.
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