Use interest rates to control inflation

The Straits Times; Published on Apr 14, 2012
Use interest rates to control inflation 
LIKE Hong Kong, Singapore has been battling high inflation and rising real estate prices with limited success ('Singdollar tipped to rise further'; Thursday).

The Hong Kong Monetary Authority does not have an easy job as it has very few policy tools available, as the territory's currency and interest rates are pegged to those of the United States.
While Singapore does not have such impediments, we have chosen to use only exchange rates, and not interest rates, as policy tools. This has worked well for Singapore in the past when inflation was mostly import-driven.
However, over the last 10 years, with the increase in population, both permanent and transient, inflation is becoming more of a result of a mismatch in domestic supply and demand. This is better addressed with managing interest rates than exchange rates.
Real estate sales are still hitting new highs, especially in mass-market projects, because of the low interest rates arising partly from the abundance of liquidity flowing from the West.
When the US economy finally recovers and interest rates start to move up, many Singaporeans may be caught off guard with higher mortgage payments that they may not be able to afford.
Yeo Chee Kean
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