CNA Explains: Fed rates on hold – how will this affect Singapore savers and borrowers? (2024)

SINGAPORE: Interest rates in the United States could stay unchangedbecause inflation has not improved enough.

US Federal Reserve chairman Jerome Powell said it would likely take longer than previously expected to gain the “greater confidence” needed to start cutting rates.

Singapore’s interest rates are determined by global rates and foreign exchange market expectations. That means broadly following the direction of other central banks, especially the US Fed.

So will savings accounts' interest rates stay high?

Not necessarily, according to experts.

UOB and Standard Chartered Bank have already lowered the interest rates on their flagship savings accounts.

Banks make interest payments to those who deposit funds with them, andearn interest income from those who borrow money from them.

Some banks have more money than their customers want to borrow, which means they are not earning much interest income.

“They have challenges lending all this money out, because property transactions have slowed down,” said Mr Alfred Chia, chief executive officer of the SingCapital financial advisory.

“At the same time they have to fork out high interest payments."

So banks that lower interest rates may be trying to reduce costs.

And as rates in the US stay high for longer, banks could continue to face the issue of having more funds than they can loan out, said Mr Chia.

But specifically for UOB, the decision to cut rates may not be due to the Fed or market expectations, said Mr Glenn Thum, senior research analyst at Phillip Securities Research.

It may instead be that the bank increased rates “too aggressively at the start”, he said.

Will fixed deposit rates increase then?

These have already fallen and are not likely to rise despite the Fed standing still.

“We won’t see the promotional interest rates that we saw previously last year. That’s when everyone was rushing to a bank,” said Mr Thum. “I don’t think we’ll see that because of the uncertainty.”

Banks would rather not risk raising rates since they are unsure of when the Fed will move.

When yields on Treasury bills – debt securities issued and backed by the Singapore government – rose in 2022, banks had to respond and increase their fixed deposit rates, said Mr Chia of SingCapital.

But these have since declined and reached a mostly stable point. They are unlikely to be too affected by the latest news from the Fed, he added.

Local banks are offering rates of between 2.7 per cent and 2.9 per cent for six-month fixed deposits, though OCBC requires a larger deposit amount than DBS and UOB, according to their websites.

What about home loan rates?

Mortgages pegged to the Singapore Overnight Rate Average (SORA) will be more impacted by the Fed, said Mr Chia.

In Singapore, a floating home loan rate is usually pegged to SORA. The interest rates vary throughout the life of the loan, depending on the economy and market conditions.

“Home mortgage rates have actually started to stabilise, some have actually (seen) some form of drop,” said Mr Chia, adding that fixed-rate packages could be around 1 percentage point lower.

According to the PropertyGuru portal, DBS offers a two-year fixed package at 2.9 per cent. The three-month compounded SORA on May 2 was 3.6491 per cent.

Mr Song Seng Wun, economic advisor at CGS-CIMB Securities, said that on the whole, he expects interest rates in Singapore to continue hovering around current levels.

But potential borrowers should also keep shopping around.

“Rates have peaked," he said. "But some places are willing to lend to you at a lower rate than others.”

When will the Fed adjust rates?

Opinions are divided.

Mr Chia and Mr Thum see up to three rate cuts closer to the end of the year, depending on how stubborn inflation is and other economic indicators such as the labour market.

But other observers believe the Fed is unlikely to cut rates this year, despite expectations.

Mr Kurt Mayell, head of trading platform CMC Markets Singapore, pointed to strongproductivity, wages and employment numbers – which impact the Fed’s decisions on rate adjustments.

Robust economic data could in fact revive rate hike fears, though Mr Powell said on Thursday this was unlikely.

Macroeconomic consultant Komal Sri-Kumar said the US presidential election in November could affect the Fed’s decisions.

“(Powell’s) statement that he does not expect a rate increase is also in some sense politically motivated, because he could not say that rates could go up and then crash the markets during the months before the elections,” said Mr Komal.

Mr Lee Kian Soon, CEO of fund management firm Astral Asset Management, said one consequence of little to no rate cuts this year would be a huge interest rate differential.

"In the short term, governments could take some measures or actions to try to calm the markets,” he said.

“But, over the longer run, this is difficult unless they raise interest rates to narrow the gaps.

"It's very difficult for most Asian central banks as they depend on the actions triggered by the Fed to decide what is best for their economies and currencies."