Singapore's Menon says currency targets need to be explored

[HONG KONG] Singapore's central bank chief, Ravi Menon, said policy makers should explore more radical ideas such as a global coordinated exchange-rate system to help limit currency volatility.

Speaking at a conference in Bali hosted by Bank Indonesia and the Federal Reserve Bank of New York, Mr Menon spoke of "target zones" for currencies.

"Even if you allow considerable amount of flexibility in exchange rates, are there some kind of target zones that can be set internationally and an international coordinating mechanism to make sure that exchange rates stay within those target zones?" Mr Menon said on Monday.

Another argument for the method is that it "also conditions market expectations and prevents overshooting and undershooting" of currencies, he said.

The debate about global coordination on foreign-exchange policies has heightened this year as central banks from Japan to Switzerland pump more stimulus into their economies to help drive down their currencies and cushion against slower growth.

Noting that targeted exchange-rate zones is a "new and more radical idea," Mr Menon said he is "not sure if it will work, but this is a time we need to explore all innovative ideas on the table."

Given Singapore's dependence on its export industry and exposure to imported inflation, the central bank uses the exchange rate rather than interest rates as its main policy tool, allowing the currency to trade within an undisclosed band.

Mr Menon isn't the first Singaporean official to suggest more coordination of currency policies. Deputy Prime Minister Tharman Shanmugaratnam said in April the world economy needs something like a modern-day Plaza Accord to safeguard growth against currency market volatility.

The accord refers to the 1985 agreement in which the US, UK, Japan and Germany sought to bring down the dollar through concerted selling on the currency market.

In practice, currency targets will have many challenges, Mr Menon said.

"If you have misalignments and your target zones don't accommodate for it, then you could be in more serious trouble later on," he said.

Simon Potter, executive vice president of the Federal Reserve Bank of New York, said at the same conference that currency policies have become more important recently.

"In our current environment, the role of the exchange rate in trade and current-account adjustments becomes more critical as monetary policy stances diverge across the major economic areas," he said.

BLOOMBERG