Monday, September 5, 2022

Bank Interest Rates: It’s Like Back In 2001

I recalled the time when I was flipping through a newspaper trying to find out the latest fixed deposit rates of the banks and finance companies. Yes, the internet back then was not so friendly in terms of having consolidated information within a click, so going for print media was the next best thing on seeing things in one page.

I was trying to park SGD 10K for about a year, as back then I did not know much about the stock market (and buying shares meant getting minimally 1,000 of them, which I could not afford, and through a phone call), interest rates was the main passive money making concept that I knew (and to think I had just graduated from an economics discipline).


The highest one-year fixed deposit rate then was about 3.25% from a finance company. This finance company had (and still has) a branch in Bedok, so I decided to walk around the vicinity to look for it (again, back then there was no smartphone for me to google the address on the spot). In the end, I went to another finance company instead (offering 3%) as I was lazy (and inherently cautious carrying SGD 10K worth of cash) to walk around further to look for the one that I had planned originally to go to (turns out that if I had persevered my journey to the next block, I would have had earned an extra 0.25%).


Interest rates were quite high then; I remembered mortgage loans were around 5% to 6%, and savings accounts were about 1.x% to 2%.


Also back in 2001, the United States (U.S.) federal funds rate was around 5.x%. Tracking the movements of both rates, it is obvious that our local interest rates and the U.S.’ were (and still are) positively correlated. Therefore, when news of the U.S. Federal Reserve planning for more rate hikes, expect our side to do the same, be it on fixed deposits, savings and mortgage rates.


Fast forward to now, we are now seeing bank fixed deposit interest rates going up into the regions (around 2.x% for a 12-month tenure) where it was unheard of for almost 15 years (I picked fixed deposit rates for a clean comparison as they are typically unencumbered with step-up and promotional rates, which are typical of savings accounts). And these rates are relatively comparable to the current offerings from treasury bills and Singapore Savings Bonds.


Having a 3% fixed deposit rate is unprecedented now, but remember, it was the norm back in 2001. Being in a near zero-interest-rate-period (ZIRP) for a long time, it is hard to blame new investors, most of whom entering the markets within the ZIRP, of not factoring in interest rates in the overall scheme of things. A diversified portfolio approach is still prudent in certain and uncertain times, and times of differing economic conditions, including interest rate movements.

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