Singapore's Interest Rate Shift

Singapore benchmark interest rate will remain fairly stable with a possible pre-emptive modest rise in the short term since the US’s rate is likely to stay low for a while. Asian central banks typically follow the Fed in interest rate setting though with a lag effect. The growth momentum in Asia outstrips those in US and Europe but despite this, the central banks in Asia are unlikely to pursue any aggressive normalization of domestic interest rates independent of those pegged by the Fed.



In the short-to-mid term view, there are two temporary depressants to any possible rate hike. The first depressant is that the world economy is still beset with uncertainties in Europe and US. The possible sovereign defaults in Greece may cause a spill-over panic and if more European countries get embroiled, the state of affair can be debilitating. Any hike will likely slow growth. The second depressant is the uneven effects of stimulative policies employed to promote recovery and their sudden withdrawal may cause steep drop in capital and consumer spending. The recovery momentum is already showing signs of slow down and any spike in interest can shift the axis of the spinning recovery to bring growth to a halt.



To be sure, headwinds to growth must remain significant and sustainable before any modest hike in interest should be considered. Any hike is likely to cool the heated economy and to bring inflationary pressure down.



An interest rate hike will likely shift demands of capital and consumer purchases to a lower gear. The flow rate of hot money will also likely be slowed down bringing assets prices, especially property prices to realistic levels. Fiscal spending is expected to wane as growth driver. At this juncture, it is better for Singapore to maintain a low interest regime to grow the economy out of the woods confidently before any contemplation of a rate hike. Q310 should be a good time for an interest rate rethink – not now. Singapore can have the last laugh.