Don't expect interest rates to rise: Experts

(taken from Straits Times 23rd November 2009)

SAVINGS accounts have seen miserly interest rates of below 1 per cent per annum since 2001 - and people hoping for better yields ahead will be disappointed.

The rates are unlikely to rise - at least in the next six months, experts say.

Monthly average savings rates have been on a downward trend from January to last month. This means the annual average rate for this year is likely to dip below last year's already paltry 0.22 per cent.

Rubbing salt into savers' wounds - inflation is likely to rise next year.



Based on figures from 10 banks and financial institutions compiled by the Monetary Authority of Singapore (MAS), savings accounts earned an average of 0.22 per cent a year in January, before holding at just 0.16 per cent from July to last month.

This is a far cry from the 1.28 per cent savers used to get in 2000, which was the last time interest rates exceeded 1 per cent.

Such measly rates have caused long-time savers such as Mrs F.S. Sim, 31, to dump conventional deposit accounts for other investments.

'The rates for my DBS Bank savings account fell from 0.25 per cent to 0.125 per cent in July...After deducting fees and taking into consideration inflation, I think I might even lose money,' said the communications manager.

Industry experts agree, saying it does not make sense for people who are looking to grow their money to put their savings in a basic deposit account, because of the meagre interest rates.

'Depositing your money in the bank with such low rates can really be only for safekeeping and perhaps for some regular transactions,' said the president of the Association of Financial Advisers (Singapore), Mr Raymond Ng.

'In fact, if you leave it in there for a year, your savings might just get eaten up by inflation.'

Last week, the Trade and Industry Ministry raised its inflation forecast for next year to 2.5 per cent to 3.5 per cent, from 1 per cent to 2 per cent, in view of the recent revision in the annual values of Housing Board flats announced by the Inland Revenue Authority of Singapore.

The MAS, however, did not revise its underlying inflation forecast of 1 per cent to 2 per cent, as its figures excluded the cost of accommodation and private road transport.

One would have to go as far back as 1997, during the last Asian financial crisis when the annual average was 3.08 per cent, for a decent return.

But Mr Ng believes that interest rates of between 3 per cent and 6 per cent are a thing of the past.

'With the current interest rates, your funds will just remain idle and there are many people out there who still do not realise that,' he added.

Deposit rates typically fall along with the Singapore Interbank Offered Rate (Sibor), which is the rate at which banks lend to one another.

Sibor is the key factor that affects the rate that banks pay depositors. It has been hovering around 0.68 per cent, not far off the all-time low of 0.56 per cent set in June 2003.

Analysts also pointed out that Sibor is influenced by interest rates set by the United States Federal Reserve.

And since December last year, the US Fed has held its key federal funds rate at a record low of zero per cent to 0.25 per cent - to help pull the economy out of the worst downturn since the Great Depression.

All signs point to interest rates staying low for some time.

Kim Eng analyst Pauline Lee told The Straits Times: 'We're looking at interest rates to stay flat in the near term, perhaps until the first half of next year.'

Bankers cited another factor for the low rates. They said local banks are typically well-capitalised and hence do not need to attract deposits, even during the downturn.

The dismal amounts earned from bank interest over the years mean the impact on savers - if there were further reductions in rates - would probably be minimal.

For example, if interest rates for a savings account were cut by half from 0.25 per cent to 0.125 per cent, a deposit of $10,000 would earn only $12.50 less a year in interest.

Those wanting to eke out a better return, however, can turn to other options, such as promotional rates that offer higher interest of up to 1.25 per cent or more if certain conditions are met. These could include maintaining a higher minimum deposit amount for a fixed period of time.

Mr Ng, however, said those seeking higher-yielding alternatives would be better off putting their savings in money market funds.