Surviving Low Domestic Interbank Rates in Singapore

Time deposit rates have moved downwards along with Domestic Interbank rates
Interest rates for savings and fixed deposits (time deposits) have reduced sharply since Oct 2007 as can be seen in the Monetary Authority of Singapore data on domestic interbank rates since Jan 2007 to Jan 2008.

It has moved downwards from the dizzying heights of 3% sometime in Feb 2007 and creeped steadily downwards towards the present 1.50% plus. If you noticed, interest rates for many banks and financial institutions fixed deposits have also moved in tandem. This is because the bank borrows from you (the depositor) and lends to other banks at the rates. If they can lend at 1.5%, then to make any meaningful margin, their cost of borrowing has to be lower than 1.5%, which explains why time deposit rates have moved downwards as well.

What can you do about it?
There is actually very little you can do about it. Unless you have millions to deposit where the bank may give you preferential rates above what they offer to the typical retail investor, the average investor will only be a price taker, i.e. you can only get the rates that are now close or lower than 1.5% or so for bank time or fixed deposits.

However, fret not, as interest rates do move up as well as down so low interest rates will not be permanent. But how long the interest rates will stay this way is any one's guess. Previously, treasury bills were a way to counteract the low interest rates given by banks for their fixed deposits. However, recent treasury bills auctions for 3 month tbills have yielded 1.49% or so. Thus, most of us retail investors do not have many viable options.

Some "savvy" investors pooh-pooh or look down on us who put some of our monies in such low yielding instruments, proclaiming proudly that inflation (projected at5%) eats up such low interest returns. They are right. However, unless they can find equivalent low risk assets which your diversified portfolio should have in some proportion, it is still a more prudent strategy to have a certain portion of your investible savings in very safe (though low yielding) instruments such as fixed deposits or even treasury bills.

Investing for the long term and building your firm foundations for financial freedom starts with always having some safe instruments to give you confidence to take a more calculated risk with your other investible savings. Never put all your eggs in one basket may mean not being able to become financially free at age 35 or 40 but you have more likelihood of being able to retire before the statutory CPF withdrawal age if you can avoid losing all or most of your investible savings. A recent article by one financial advisor who lost $380,000 over the CLOB debacle shows us the folly of trying to get rich fast by taking inordinate amount of risks and with borrowing to invest.

Slow and steady wins the race and may you, your family and loved ones be well and prosper during this Lunar New Year and for 2008!