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Sunita Sue Leng: Negative interest rates continue to hurt PDF
Tuesday, 21 February 2012 16:04
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QUITE A FEW retirees I know spend a good portion of their time going on a “fixed deposit chase”. This involves sniffing out the best rates offered for one-, three- or six-month deposits by each bank, then parking your funds at the bank or finance company with the highest rate. Before the time is up, be sure to compare rates again and shift your funds to the bank with the better rate, even if it is just a few basis points more.

In recent times, however, the FD chase is no longer worth it. Interest rates have steadily headed south and are now wallowing near the bottom of the barrel. Threemonth FD rates were around 0.16% in 3Q2011 versus 0.51% in 2007, according to data from the Monetary Authority of Singapore. Rates in savings accounts are even more tepid and rates on current accounts — at just one to five basis points a year — often do not even cover the costs of maintaining the account.
 
So, the launch by Standard Chartered Bank of a high-yield current account on Feb 15 is likely to raise eyebrows among desperate chasers of deposit rates. Through its new Bonus$aver current account, which is bundled with a credit card, Standard Chartered is offering 1.88% a year. Of course, there are caveats. First, the customer has to spend at least $500 a month on the bundled Bonus$aver credit card. Second, the high rate applies to the first $25,000 in your account. Amounts beyond that earn a mere 0.1% to 0.2% a year.
 
Standard Chartered is confident its new product will be a game changer. It could even become one that could “kill” the FD market, says its head of consumer banking Dennis Khoo. For one thing, unlike FDs, the Bonus$aver has no lock-up period. It also has no minimum deposit amount.
 
Certainly, for the man in the street, that rate is as good as it gets in the local savings market. However, the real headache for savers is that we are in a situation of negative real interest rates. The interest on your savings minus expected inflation is currently below zero. Last year, inflation in Singapore spiked up to 5.2%. This year, the MAS predicts it will be between 2.5% and 3.5%.

 
LOW RATES TO STAY
In other words, the money that is sitting in your bank account, with its near-zero nominal rates, is shrinking day by day. Even worse, this situation of negative real interest rates could well continue for the coming one to two years.
 
With the US economy not quite out of the danger zone and the eurozone struggling to ringfence its mountain of sovereign debt, monetary policy is likely to stay very loose. Indeed, the US Federal Reserve — which has kept the federal funds rate near zero since the global financial crisis — has said it would keep rates “exceptionally low” until late 2014, as it sees economic weakness persisting until that time.
 
And yet, it is not just money in the bank that is losing its value as the days go by. Retirement savings are at risk as well. For most Singaporeans, aside from the homes they own, the bulk of their retirement income is their Central Provident Fund money. Currently, the return for the first $60,000 is 3.5% in the CPF Ordinary Account (capped at $20,000) and 5% in the Special, Medisave and Retirement accounts. Outside of this, the rates fall to 2.5% and 4% respectively.
 
These rates are risk-free, as all CPF balances are guaranteed by the government. They are also much better than anything you can get at the bank. And, despite inflationary episodes, the 10-year annualised real rates of return on Ordinary Account and Special Account balances have remained positive between 1995 and 2010, according to a CPF paper on interest rates and real returns dated October 2011.
 
However, that’s just until 2010. Given last year’s inflation spike, real CPF returns could well have soured. This year, even as headline inflation moderates, the outlook for CPF returns remains dicey. If inflation comes in at the top end of the government’s forecast this year, the first $20,000 of your money in the Ordinary Account will effectively have earned nothing. Sums beyond that, which earn a paltry 2.5%, will have been eroded by inflation.
 
ASSET BUBBLES
Negative or even minimally positive real interest rates punish savers by reducing the future value of their retirement money. At the same time, it tends to breed bubbles. When real interest rates stay negative for a prolonged period — as seems to be the case now unless inflation comes off sharply — money has little choice but to search for better returns elsewhere. The most common avenues are the stock market, the property market or commodities such as gold.
 
That has certainly been one of the prime drivers of the boom in realestate prices in Singapore in recent years. Despite concerted efforts by the government to curb speculation, property prices have stayed stubbornly high. For many Singapore investors, it pays to put your savings in a house than in the bank, where the chase for FD returns has fast turned into a race to the bottom.
 
Last Updated on Wednesday, 29 February 2012 20:32