Friday, May 21, 2010

All time low rates ‘may overheat property sector’

Interbank lending rates have fallen to all-time lows here and market watchers have raised concerns that cheap lending may lead to over-heating in the property sector.

Responding to media queries at a Ministry of Trade and Industry briefing yesterday, Monetary Authority of Singapore (MAS) deputy managing director Ong Chong Tee said the fall in Sibor rates partly reflects market expectations of a stronger Singapore dollar, following a move by the MAS to a policy of currency appreciation from a neutral policy last month.

The Singapore Inter-Bank Offered Rate (Sibor) refers to the rate at which banks in Asia lend money to each other and is a key component used by banks in setting their home loan rates. The three-month Sibor dropped to 0.52 per cent at end-April and is expected to remain low, said DBS in its latest research report.

DBS economist Irvin Seah said the low interest rate environment may encourage speculation in the asset market especially for the property sector, unless “administrative controls are put in place to keep the lid on asset inflation”.

Cheap home loans, as well as commodity and fuel prices, are among the factors that could affect inflation.

The Singapore Government had earlier introduced measures to cool the property market but risks remain and more such cooling measures may likely be introduced, Mr Seah said.

The Sibor rate is expected to fall to near-zero levels at about 0.40 per cent by the third quarter – a drop of about 12 to 14 basis points, said DBS head of economic and currency research David Carbon.

But some watchers do not see the rates coming down any lower.

Forecast regional economist Vishnu Varathan pointed out that the Sibor will usually follow the US Federal funds rate, which are already at the bottom-levels. The US Federal funds rate refers to the rate that banks charge each other on overnight loans.

With deposit rates at a low, general manager Wong Sui Jau sees bank savings account interest rates falling to 0.1 per cent or even lower. This may be an opportunity for consumers to consider alternative ways to park their monies, as Mr Wong said they could consider investing in short-duration bond funds and money-market funds.

These funds are low-risk and yet provide a yield that is slightly higher than fixed deposits and bank savings accounts, he said. “Ultimately, investors have to accept that the higher the potential return they wish to get, the higher the risk they must take,” he added.

Source: Today, 21 May 2010

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