Ask Fear & Greed: Why doesn't the RBA copy Singapore?

Listener Lynn asks:

It's commonly said that the RBA's use of interest rates for monetary policy is a blunt tool which affects mortgage holders disproportionately.

I've recently heard of an alternative: the Monetary Authority of Singapore manages monetary policy not by using interest rates. 

Instead it lets the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band, known as the Singapore dollar nominal effective exchange rate.

Why don't more reserve banks do this?

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Episode Transcript

Speaker 1 (00:03):
Welcome to Ask Fear and Greed, where we answer questions
about business, investing, economics, politics and more. I'm Michael Thompson
and hello Sean Aylmer.

Speaker 2 (00:11):
Hello Michael, Sean.

Speaker 1 (00:13):
Today's question comes from Lynn and I love getting questions,
and this one's coming via our website Fearangreed dot com.
Toda you, and she says, high Team, Fear and Greed.
This is I'm going to read this bit too because
I quite like it because it praises us. Sean, She says,
this is a rather long question, so I hold a
less than fifty percent hope of it being answered on air. Well,

(00:36):
but I'm giving it a shot because I really like
the way you explain complex concepts simply. Are you feeling
no under pressure? No pressure? Here he goes. Lynn says,
it's commonly said that the Reserve Bank's use of interest
rates for monetary policy is a blunt tool which affects
mortgage holders disproportionately. All right, we've discussed that before. Lynn says,

(00:59):
I I've recently heard of an alternative. The Monetary Authority
of Singapore manages monetary policy not by using interest rates. Instead,
it lets the Singapore dollar rise or fall against the
currencies of its main trading partners within an undisclosed trading
band known as the Singapore Dollar Nominal Effective exchange rate.

(01:23):
And Linn's question here is why don't more reserve banks
do this.

Speaker 2 (01:28):
It's a great question because Singapore is fascinating on this.
The only thing, Lynn, I think it is a disclosed
rather than an undisclosed trading band. That would be the
only common I would say on the question. So central
banks around the world us interest rates to impact the economy.

(01:49):
What you do is you shift the official rate, the
cash rate in Australia, and you shift it up. That's
the base rate that's used for a bank to borrow
money off another bank. But on top of that there's
a risk. So you know, homelands has a certain risk
might be x. Credit cards might be two x. Buying
cryptocurrencies might be three x. So what it is you're

(02:12):
paying the cash right plus the risk premium. As the
cash rate goes up, all rates go up, and that's
what the reserve bank does to kind of take some
of the oomph out of the economy or put some
womph back into the economies. That's how interest rates Singapore
is really cool. Because it is such an economy so

(02:33):
reliant on international trade, the monetary authority of Singapore can
just shift the currency and have an impact on what's
happening in the local economy. So let me think about this.
The Singapore dollar has an effective exchange rate which they

(02:56):
strengthen all weaken against those of its main trading partners.
Singapore is a small economy, totally reliant on trade. You know,
you can't grow a lot of stuff in Singapore simply
because it's too small. So in gross exports and imports
of Singapore are about three times the level of its GDP.

(03:20):
So everything it does is about trade. Like forty cents
in every Singapore dollar is spent on imports.

Speaker 1 (03:30):
And it's big partners of what kind of Malaysia and
looking this up the US.

Speaker 2 (03:37):
Yeah, so the US is a big partner in region
where it sits okay yep. So that means because there's
such huge trade flows in Singapore, you don't need interest rates.
The currency is actually more effective. So you shift the
currency and you make imports more expensive. That's actually a
way of dulling economic growth. You shift the current. See

(04:00):
you make inputs cheaper, it actually boosts economic growth. The
reason it worse than Singapore and it doesn't work almost
anywhere else is because it is so trade related, so
trade reliant, all.

Speaker 1 (04:13):
Right, whereas in Australia there's too many other kind of factors,
for instance, that would that also affected.

Speaker 2 (04:19):
So yeah, so yeah, that's exactly right. I mean, we're
nowhere near is trade reliant as Singapore. I mean we
can grow our own food, we can create our own energy,
all those sorts of things, whereas basically Singapore has to
import and export all sorts of stuff.

Speaker 1 (04:34):
Okay, God, that's a good question.

Speaker 2 (04:36):
Though. It's a great question because I kind of knew
about that, but I didn't know a lot about it.
And it's really fascinating how Singapore runs its monetary policy.

Speaker 1 (04:46):
It's different, and it's really just very much because of
its because it's really quite unique circumstances.

Speaker 2 (04:52):
Yes, yes, yes, I'd say so Okay, some listeners will say, oh,
but what about and maybe there are other countries out
there that do, but I'm not aware of them.

Speaker 1 (05:02):
No, And we would welcome that feedback absolutely, I would
love to hear that, and just like we welcome questions
like this one from Lynn. So thank you Lynn for
getting in touch with your question and thank you Sean
for answering it. Most welcome Michael, and if you've got
your own question to ask, then please do what Lynn did.
Head to the website Fear and Greed dot com, DoD
a you, or jump onto any of the social media
platforms we're big on LinkedIn, Instagram, Facebook and the rest.

(05:26):
It can send it on through there and we will
get to it as soon as is humanly possible. I'm
Michael Thompson. This is as Fear and Greed