The irony behind low interest rates in Singapore

October 5, 2012 / By

Four years after the collapse of Lehman Brothers roiled global markets, the US unemployment rate still stands at a stubbornly high 8.1%, and economic growth, as of 2Q12, is now languishing at a low 1.3%. The weak economic picture remains, despite the slashing of interest rate levels to extremely low levels not seen since the Great Depression and the subsequent introduction of the quantitative easing program (QE), which saw the US Fed injecting liquidity into the economy through buying of asset securities.

As US policymakers scramble to find more ways to accelerate growth, the Singapore government has been introducing successive rounds of cooling measures to minimise speculative residential sales activity and tame the strong growth in housing prices; thanks to the low borrowing costs which mirror the US Fed’s rates. Although not totally immune to the onslaught brought on by the collapse of Lehman Brothers, the private residential property price index saw a strong rebound in 2009, surpassing the pre-Lehman level and the historical peak seen before the 1997 Asian Financial Crisis. These government measures have however driven retail investors to invest in other assets, such as industrial and commercial properties.

While low interest rates traditionally benefit investors, they also tell a deeper story about the state of the economy. The motivation behind the Fed’s decision to keep interest rates low for a long period stems from the grim outlook of the US economy, which is still struggling to gain growth traction. Ironically, investors seem to be missing the rationale behind the low rates in Singapore and see the long period of cheap liquidity as a golden opportunity to invest more cash into real estate.

Unlike the US, which controls growth via interest rate policy, Singapore manages its growth through the exchange rate policy by adjusting the pace of its domestic currency’s appreciation against an undisclosed basket of currencies. The borrowing costs in Singapore closely mirror the US Fed’s rates, which are expected to stay low for an extended period of time and have prompted policymakers to introduce a slew of cooling measures and policy changes to weed out potential speculators.

Despite Singapore being one of the few AAA-rated Asian countries thus justifying the inflow of investments, its strong reliance on trade and exports means that the economic performance of its larger US and European counterparts cannot be ignored. The recent introduction of QE3 and the decision to extend the low interest rate level, which was previously set to finish in 2014, to 2015 are the results of the blow to market confidence caused by the ongoing sluggishness of the US economy and EU debt crisis.

Once again, the extension of the Fed’s policy tools is a testimony to the bleak outlook of the global economy. While one would hence expect the weak economic fundamentals to hold back further growth in asset prices, a strong boost to asset prices has traditionally followed QE programmes. That being said, the recent QE3 would likely keep Singapore policymakers alert; heightening the risks of additional cooling measures by the government.


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