In November, the U.S. Federal Reserve is expected to raise benchmark interest rates by 0.75 percentage points for the fourth successive time in a bid to tame inflation. With recession a real possibility, Singapore consumers may see rising housing loans and decreasing spending power, although an increase in savings account rates could cushion the impact.
Sky-high consumer prices that show no signs of abating have continued to pummel markets, with more ramifications in store. Against the backdrop of soaring inflation, the U.S. central bank is again expected to raise its benchmark interest rates by 0.75 percentage points - the fourth time in a row this year - on November 3 to a rate of 3.75 per cent to 4.00 per cent.
But the worst may be yet to come as the Federal Reserve warned of further hikes to 4.4 per cent by end-2022, and potentially up to 4.6 per cent in 2023.
The move will set off a rippling effect towards countries like Singapore, which has already seen its core inflation rise to 5.3 per cent in September 2022 as it climbed towards a 14-year peak. This was driven by an increase in prices for fuel, food and services. In the near-term, headwinds such as Europe's energy crisis and the ongoing Russia-Ukraine War will likely prolong global inflation.
These developments have raised recession fears worldwide, and Singaporean consumers could soon feel the impact on our shores - they can expect mortgage rates to surge, while also seeing their spending power take a hit as borrowing costs increase.
Spending more on homes
In September this year, public housing resale flat prices in Singapore rose for the 27th consecutive month, growing by 1.2 per cent in a hot property market. However, potential homeowners may now need to think twice before splashing the cash.
For one thing, home loans are pegged to the Singapore Overnight Rate Average (SORA), which is affected by changes to the U.S. Fed Funds Rate.
Gone are the favourable low interest rates of 2020. Instead, median rates for two-year and three-year fixed rate mortgage loans have shot up from about 1.5 per cent at the start of 2022 to more than 2.6 per cent currently.
This means that existing homeowners could end up paying higher interest on floating rate housing loans when interest rates rise, while house hunters have to reassess the need to buy a home as fixed rate loans may be offered at shorter periods or increased rates.
The diminishing purchasing power
Aside from stymying big ticket purchases, higher interest rates will also slow down consumer spending amid rising borrowing costs. The negative outlook could spark a drop in buying confidence and push them to save instead. After all, cash is king during a downturn.
With car and credit card loans becoming more expensive per month, more will be looking to relook their finances and reining in unnecessary expenditure.
And as personal and business loans require more outlay, businesses may delay their expansion plans as they may deem savings to be a more important and attractive option - at least until inflation is quelled and there is better growth visibility.
Save more with better interest rates on deposits
Spenders may suffer, but savers may see a silver lining during this time. Those with money to spare in the bank could enjoy higher interest rates for fixed deposits, albeit not enough to stave off inflation completely. Rather, it is a stop-gap measure to avoid the further loss of spending power.
In fact, this is an opportunity for consumers to re-evaluate rates from different banks and switch to one that offers higher yields. For instance, Maybank's Singapore Dollar and iSAVvy Time Deposits currently offer a promotional rate of up to 3.20 per cent.
As high interest rates are not going away anytime soon, parking cash somewhere that shields you from the full brunt of inflation may be one way to preserve your wealth. Assessing your options and hunkering down will help you ride out the storm.
the bottom line:
With inflation yet to subside despite the aggressive rise in interest rates, consumers in Singapore may have to tighten their purse strings when it comes to housing loans and purchases, and find competitive fixed deposit rates to soften the impact of inflation.
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