INFLATION AND DECLINING INTEREST RATES

INFLATION AND DECLINING INTEREST RATES:

(Impact on Singapore households): 1.

Mdm Ho Geok Choo asked the Minister for Finance (a) what is the outlook for interest rates in Singapore for 2011; (b) what percentage of the population above 55 years old have only saving deposits as their assets, apart from their homes; and (c) what can be done to help this group of people to get more returns on their savings.

2.

Ms Irene Ng Phek Hoong asked the Minister for Finance with inflation at its highest level since January 2009 and expected to rise in 2011, (a) what will be the impact on Singaporeans on low or fixed incomes, such as retirees, and what can be done to assist them to cope with the cost of living; and (b) how Singaporeans can be encouraged to save, given the low returns on savings from banks.

The Minister for Finance (Mr Tharman Shanmugaratnam): Mr Speaker, may I take Question Nos. 1 and 2 together?

Mr Speaker: Yes.

Mr Tharman Shanmugaratnam: Ms Irene Ng referred to the impact of higher inflation on Singaporeans. CPI inflation for November 2010 was 3.8% year-on-year, bringing the average over January to November to 2.7%. It is expected to rise further in the first quarter of this year, before moderating in subsequent quarters.

However, about half of the "headline CPI inflation rate" over the last year has been due to a single factor – the sharp rise in COE premiums. This CPI increase hence does not mean a similar increase in

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actual cash outlays by the majority of Singaporeans, as only 3% to 4% of households, or 7% of all car owners, purchased new COEs in 2010. The majority of car owners hold existing COEs. If COE premiums stay high, everyone who purchases a new car or renews a COE will eventually face this higher price. However, the purchases will take place over a period of years. Hence, the impact on cash outlays for households as a whole will be spread out over a few years.

Excluding the recent increase in COE premiums – which contributed significantly to the "headline CPI inflation rate" – inflation during January to November 2010 averaged about 1.3%. It was due mainly to increases in prices of various foods and oil-related items in the household consumption basket. These price increases reflected weather-related disruptions in food supply from abroad, increased demand in emerging countries like China, and the uptrend in global oil prices. These external factors will unfortunately continue to impact us and are likely to raise domestic prices further in the coming months.

The best way to help Singaporeans to manage these increases in the costs of living is to grow the economy in a sustainable way and raise our skills, so as to help wages grow. That remains our central strategy. However, for households who are not earning any income from work, including most elderly households, inflation is always a problem. The Government is mindful of the problems these households face, and has provided them with significant assistance over the last year – in fact exceeding the increase in costs of living they have faced. Take for example a retiree couple, living in a 3-room flat. They would have received a total of $1,200 in benefits last year. This would have exceeded the total increase in costs that such households would have faced as a result of rising food, utilities

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and other prices. If they were living with children who are low-income earners, the assistance provided by the Government would also be considerably greater, as the household would have received Workfare Income Supplement (WIS). The WIS would have gone to the working child, if he or she had a low income.

This approach will continue in the upcoming Budget. The Government will take into account the impact of inflation and the needs of low-income and retiree households when considering further transfers.

Ms Irene Ng and Mdm Ho Geok Choo had also asked about the outlook for interest rates and what can be done to help Singaporeans, especially the low-income and elderly, get more returns on their savings. The current low level of interest rates reflects loose global liquidity conditions. We do not make official forecasts of interest rates, but market analysts believe that this low interest rate environment could persist for a while in view of the still weak recovery of the US and other developed economies.

However, low-income savers in Singapore are in fact less affected by bank deposit rates than our CPF interest rates. Apart from the homes they live in, CPF savings are the main source of retirement funds for low- and middle-income Singaporeans. CPF interest rates are currently significantly 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 the money is in the Ordinary Account, and 5% if it is in the Special, Medisave or Retirement accounts. So 3.5% and 5% in a member's CPF accounts for the first $60,000, which are significantly above bank interest rates.

For Singaporeans who do not have significant spare savings – which include

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many of our retirees – it remains best for them to keep their investments simple and conservative. It has been and remains unwise for them to seek higher returns by investing in high risk assets. As Members know, through the MoneySENSE financial education programme, we have been seeking to help more Singaporeans plan for retirement and invest their spare savings prudently.

Our capital markets are also developing and offering more investment alternatives. These include instruments that offer better returns than savings deposits but without overly high risk. Retail investors can now participate in Singapore Government Securities (SGS) auctions via ATMs of the three local banks. By the middle of this year, they will also be able to buy and sell SGS on the Singapore Exchange. Well-rated corporate bonds are also becoming more widely available, as high quality borrowers are turning more to the bond market to meet their financing needs. Some of these companies have begun to issue bonds aimed at retail investors, and we can expect this to be a growing trend in coming years.

Ms Irene Ng Phek Hoong (Tampines): Mr Speaker, according to the latest household expenditure survey, HDB residents spent up to 36% of their household expenditure on food including hawker fare. So any increase in the food prices is felt keenly. Is the Minister aware that in recent weeks, the cost of a cup of coffee has gone up by five cents to 20 cents in some food courts, attributed to global price hikes in sugar and coffee? Is the Minister also aware that the privatisation of hawker centres and coffee shops to large chains has led to higher prices? Nasi padang in some food courts can cost more than five dollars. Can the Minister assure us that food prices remain affordable, especially to people with modest income, and that businesses will

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not use inflation as an excuse to jack up prices and profiteer?

The Minister spoke about investing prudently. Can the Minister address the trend of banks encouraging people to spend and to incur debts with easy credit and promotions rather than to save and to invest prudently? And does the Minister agree that the surge in the number of credit cards per person and the growth of rollover balances are danger signs that people are being ensnared in the cycle of debt?

Mr Tharman Shanmugaratnam: Sir, food price inflation is a concern. In November, it was already about 1.8% higher than it was a year earlier and it is likely to rise in the coming months for the reasons I mentioned. Several key commodities are seeing prices go up significantly in global markets: sugar, which partly accounts for prices at coffee shops going up, coffee itself, wheat, soy beans and several other commodities. This will impact us.

We will take into account all factors when we look at the needs of the poor and the elderly, who tend to spend more of their cash on food items compared to middle- and higher-income households. We will take into account their needs.

Whether or not prices are going up too rapidly in response to higher import costs, this is something we always monitor. The Ministry of Trade and Industry has a committee that looks into profiteering. Minister of State Lee Yi Shyan heads it. If the Member finds something unusual happening in her neighbourhood, it is useful to pass on the information.

The Monetary Authority of Singapore (MAS) keeps looking at how banks go about their marketing strategies for credit cards as well as consumer debt generally, both from the point of view of ensuring proper professional practices and also to

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make sure that people are not over-extending themselves. Our rules on credit cards and consumer credit are more conservative than in most countries including those in Asia. We limit consumer credit based on how much income you earn. You cannot borrow on credit cards unless you have a minimum income level. But it is something we are watching closely and if Members notice anything that struck them as especially sharp – aggressive marketing practices on the part of banks – it is useful to provide some feedback to the MAS and they will take a look.

Mdm Ho Geok Choo (West Coast): Mr Speaker, I would like to ask the Minister three supplementary questions. Would the Minister consider commissioning a survey which would allow policymakers to assess how low interest rates are affecting ordinary households? Has the Government done a survey to see what companies, themselves, are doing to prevent prices from rising too quickly especially businesses engaged in daily consumables and transportation? What can the Government do to help these businesses?

Mr Tharman Shanmugaratnam: There is no harm in having a survey to see if it provides a picture different from what the national statistics show. The Ministry of Trade and Industry is in charge of this, but those of us in Government are familiar with how the Department of Statistics goes about its work. The CPI has integrity. It is a robust process of sampling, every so many years, of the household expenditure basket; and they measure prices constantly. The figure I mentioned earlier – for instance for food in November, the average household food expenditure for a set basket of items faced prices that were 1.8% higher than a year ago – that is correct. We will be able to find individual items that went up much faster – whether it be cooked food in hawker centres or items of raw food that you are buying from the

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supermarkets or wet markets. But, on average, it went up by 1.8%. We think it is going to go up further. We are concerned about this and we will be studying this to see how we can help households, particularly the low-income households and the elderly.

Dr Lily Neo (Jalan Besar): Mr Speaker, the Minister said earlier that any rise in the cost of living will cause the greatest impact on the lower income families and retirees. In fact, some of them may spend as much as 50% of their monthly income on food. May I ask the Minister's response to the United Nations' Food and Agriculture Organisation's (FAO) warning on record food prices? What kind of reassurance can I get from the Minister that his Ministry understands the plight of our residents especially those on meagre incomes? Is there any urgent assistance funding available to prevent hardship and hunger for the low-income families?

Mr Tharman Shanmugaratnam: Dr Lily Neo referred to the Food and Agriculture Organisation (FAO) which has been monitoring prices, and which issued a statement recently expressing concern about what is happening in world markets. They were particularly concerned about the impact on the poorest countries in Africa and elsewhere. I think in this part of the world, although economic growth is rapid, we are also facing problems of our own – coming out of high demand in China and some weather-related disruptions. Fortunately, we are not as much a consumer of wheat as we are of rice, but nevertheless there is a certain amount of wheat that goes into the household basket in one way or another, and various other products like sugar and so on. We are concerned about it. As I mentioned, the increase in the average household expenditure basket as a result of CPI increases has not been too

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significant so far but we are watching it and we think it will go up further.

In the Budget, we will take all this into account in deciding what assistance we should provide to households, in particular the poor and the elderly. As the Member knows, we also have ComCare and other schemes which allow residents who are truly in need to get assistance. That is not something we are short of. ComCare is well funded. We will take another look at this in the Budget.