Negative Interest Rates and Singapore
Interest, when it comes to the rate charged by banks is a good thing isn’t it? Yes, throughout the history of banking the interest was a way of rewarding investors by giving them a (albeit small) percentage on top of the amount they have squirreled away. There has been a lot of speculation recently however about negative interest rates. So just what are these, why is there a possibility of them being introduced, what impact will this have in Singapore, and finally what is the likelihood that Singapore will experience negative rates?
What are Negative Interest Rates?
They are when banks impose a negative rate of interest on any money you have invested in that bank. So for instance if you currently have S$10,000 in an account that has an interest rate of 3%, that lump sum would earn you S$300 over the year. If on the other hand the bank suddenly introduced a negative rate, let’s say a rate of -2%, then it would cost you S$200 a year for the privilege of allowing the bank to keep your S$10,000 for you.
Why would they ever be introduced?
Like with all interest rates, the banks are merely following the rates set by the central/federal bank/government. Across Europe, and in the United States, these rates have been perilously close to 0% for several years now, and there have been genuine discussions regarding the merits of them decreasing them further to 0% or below. The theory behind this is that if there is no benefit – or even a penalty for having money stashed away for a rainy day – people will be far more likely to withdraw it and spend it, resulting in a boost for the respective economy.
The reason that interest rates are so low in the first place is an attempt (among other things) to drive up inflation. On paper this would come about as a consequence of people borrowing more money (interest rates work both ways of course) and then investing it in anything they see giving a potential higher return than in the banks, property for instance. The problem has been that inflation has been practically non-existent, even negative in some instances, principally down to such things as the falling cost of oil.
What will the impact be in Singapore, and will we follow suit?
The local situation in Asia, and Singapore is very different. Here interest rates have been slowly – but steadily – increasing. For instance, the Sibor (the rate that banks lend to each other) is now at 1.25%, double that of just 12 months ago. Predictions are for all interest rates in Singapore to continue to rise steadily over the next 2 years at least.
The problem is though that much of the world’s economy is experiencing problems, so it is unlikely that Singapore – especially bearing in mind that we are such a world financial hub, will get away unscathed. Just what that impact will be, and how deep it will shake our economy is a whole different mater, and one that is very hard to predict.
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