Op-Ed: Singapore’s defensive monetary policy strategy

Trump seems to liken trade to a game of poker – a zero-sum game. As trade can be win-win, or lose-lose as of late, that analogy fails to hold up. However, supposing it does hold up, America with its large stack would likely be a hybrid of “donkey” and “bully;” and although bullies are irksome, should Singapore play her cards right, she might just win the final laugh.

Despite Trump’s tariffs threatening higher costs, unemployment and diminished exports, Singapore’s monetary policy and role as a neutral hub may cause her to be surprisingly resilient in the trade war. In January 2025, the Monetary Authority of Singapore eased monetary policy for the first time since the pandemic’s onset in 2020, and the outlook remains dovish. Besides lower rates incentivizing spending and investment, the practice of targeting exchange rates rather than interest through the S$NEER enables the MAS to fine-tune Singapore’s net exports. 

In the January MAS Monetary Policy Statement, the Singaporean dollar showed trends of depreciation against the US dollar. As Singapore’s market interest rate generally mirrors that of other major central banks (due to the lack of interest rate management), there is reason to believe this trend will be sustained in the second and third quarters as trade tensions escalate, due to projected rate cuts by the Fed. This has the knock-on benefit of Singapore exports becoming cheaper for US consumers, possibly offsetting the slash in export volume. 

Moreover, the Singapore dollar still maintains a gradual appreciation against the currencies of other trade partners such as China and Malaysia. While this may seem unremarkable, Singapore could be poised as a relative winner here to the combination of trade diversion and lower imported costs of production. Though trade diversion traditionally refers to trade moving from one country to another due to the onset of a trade agreement, the blanket tariffs have already led to trade diversion of Chinese goods towards Europe. Usually, this raises the issue of reducing net exports for Singapore in the short-run, though in the long-run Singapore is likely to recover as it mostly imports raw materials (like energy, chemicals and minerals) and machinery from Asia; a greater volume of such imports in conjunction with currency appreciation make these goods cheaper for Singaporean producers, lowering costs, softening inflation, and promoting growth and jobs. This is where Singapore’s neutral position is crucial: commitment to free trade with ASEAN could enable it to export more to them without the move being seen as predatory. 

A vital aspect of central banking is price stability when loosening or tightening monetary policy. Veering in either direction too strongly or too quickly risks sending signals to consumers and investors of volatile economic conditions, thus heightening pessimism. Despite the aforementioned currency fluctuations, the general direction the Singapore dollar is taking with the overall S$NEER currency basket is slight appreciation, which is not much different than before. This means that as a whole, exchange rate management (as opposed to interest rate management) has given Singapore a strong hedge against harsh economic headwinds. 

In addition, should Singapore keep their promise of not retaliating with tariffs against the US, this could generate comparatively favorable business conditions. For one, it has only been hit by the minimum 10% blanket tariff, which clearly enhances relative profitability for firms exporting to the US. More subtly, however, other favorable business conditions like political stability, stable prices and lower production costs further attract investment into Singapore further engendering growth. Singapore (alongside ASEAN) must remain level-headed and maintain neutrality as these attractive conditions are unlikely to prevail should they impose tariffs, similar to what has been done by China, Canada or the EU.

Now, Singapore could very well walk out of this ordeal as a relative winner, but can it enjoy a positive net outcome in absolute terms? That depends on several factors, perhaps the most significant of which is whether the US further escalates its tariffs on Singapore — raising the blanket tariff rate above 10%, or worse, imposing sector-specific tariffs on, say, pharmaceuticals. That is outside the realm of central banking, as the appropriate action would be for Singapore and ASEAN to aim for bilateral and multilateral dialogue with America to prevent this catastrophe. What the MAS can do, however, is sustain the depreciation against the US dollar to lower market interest rates without affecting trade with ASEAN. All the while, it should monitor commercial banks’ solvency to ensure their profitability in spite of lower profit margins.