Impact of Inflation and Interest Rates on Singaporeans' Savings

Ms Tan Su Shan asked the Prime Minister in light of the current Consumer Price Index at 5.2% and low interest rates resulting in Singaporeans who are nett savers and depositors suffering from savings erosion and yet having to pay more for goods and services, whether the Ministry has any plans to alleviate this situation and to preserve the incentive for Singaporeans to save by, for example, encouraging the issuance of inflation-linked bonds for the retail market.

The Minister of State for Defence and Education (Mr Lawrence Wong) (for the Prime Minister): Mr Speaker, Sir, I am taking this question on behalf of the Deputy Prime Minister and Chairman of the Monetary Authority of Singapore (MAS) and in my capacity as Board member of the MAS.

Ms Tan Su Shan asked about the impact of high inflation and low interest rates on Singaporeans. Singapore's CPI-All Items inflation averaged 5.0% in the first five months of the year. This headline number includes imputed rentals on owner-occupied homes, which do not involve any expenditure by households. It also includes the sharp increase of car prices over the last year, due to the spike in COE prices, which also do not affect the average Singaporean directly. Excluding these two factors, inflation was 3.2% on average in the first five months. Inflation is expected to moderate gradually in the second half of the year. Nevertheless, we recognise that it is uncomfortably high, and it is also higher than bank deposit rates.

The current low interest rates on domestic bank deposits reflect the extremely low or near-zero rates in the US and other advanced economies and very loose global liquidity conditions. Unfortunately, interest rates are expected to stay low for some time, in view of the still fragile recovery in the major economies.

The Government is mindful of the problems such an environment poses to savers and depositors. We are studying what can be done to help Singaporeans get better returns on their savings. Apart from bank deposits, Singaporeans have substantial savings in the CPF. In fact, CPF savings are the main source of retirement funds for low and middle-income Singaporeans. CPF interest rates are currently much higher than bank deposit rates. This is especially so for the first $60,000 of a member's balances, which currently earn an interest rate of 3.5% if it is in the Ordinary Account, and 5% in the Special, Medisave or Retirement accounts. Beyond the first $60,000, the interest rates earned are 2.5% and 4% respectively. On average, over the past 10 years, the interest rate on CPF savings has exceeded inflation.

Ms Tan also asked about retail financial products that would help preserve Singaporeans' willingness to save, in light of sustained inflationary pressures. With the development of our capital markets, more investment alternatives are now available. Corporate bonds, for instance, provide higher returns depending on their risk profiles. Singapore Government Securities are also more readily accessible to retail investors and have been traded on the Singapore Exchange since July last year.

Ms Tan also mentioned inflation-linked bonds, which allow investors to have returns linked directly to inflation. MAS is studying the feasibility of such bonds. However, we have to recognise that market-pricing for an inflation-linked bond under the current very low interest rate environment could mean investors having to pay a large premium for such bonds. Furthermore, investors will suffer a loss should inflation fall below expectations.

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For Singaporeans who do not have significant savings, it remains best to keep their investments simple and conservative. Through the MoneySENSE national financial education programme, we seek to help Singaporeans plan for their retirement and invest their savings prudently.

Ms Tan Su Shan (Nominated Member): Sir, I thank the Minister of State for his answer. My supplementary question arises from an understanding that there is just a lot more Singapore Dollars in the system than there are Singapore Dollar (Sing Dollar) assets to absorb the Sing Dollar deposits. Hence, my question is: are there plans to relook at the Sing Dollar asset base where depositors can improve their returns? He rightly pointed out that there were more Sing Dollar corporate bonds in existence, and that is something to be applauded. However, that is only for the high end. And my question really comes from what are we doing about the middle to lower income savers who have cash in deposits. Are there ideas taken into consideration to increase, perhaps, the liquidity of such Sing Dollar bonds into smaller tranches?

Mr Lawrence Wong: I thank Ms Tan for the question. As I mentioned earlier, this is an issue which we recognise is a concern that Singaporeans would ask themselves, especially in the current inflationary environment and low-interest rate environment. So, MAS is looking at different ways. One specific idea that we are studying is this idea of an inflation-linked bond. But, as the Member is aware, there are no free lunches. An inflation-linked bond works well when your actual inflation turns out to be higher than expectations, because inflation-linked bonds would have already priced in expectations. So, if the actual inflation turns out to be higher, that works well for the investor. But in the current environment where there is already a high expectation of inflation and if actual inflation turns out to be lower, then, an inflation-linked bond may not be as good as a nominal bond.

There are different ways in which we can think about providing better returns. We are looking at what are the possible options that we can provide and these are all ideas that MAS is studying.