US Fed Cuts Interest Rates: Implications for Singapore Investors

On September 17, 2023, the United States Federal Reserve announced a cut in interest rates, reducing them to a range of 4 percent to 4.25 percent, the lowest level since late 2022. This decision, characterized by Fed Chair Jerome Powell as a “risk management” response to a weakening labor market, could prompt Singaporean investors to reconsider their low-risk investment strategies, particularly those relying on fixed deposits.

As the Fed is expected to implement two additional rate cuts this year, the implications for Singapore’s financial landscape are significant. Many investors who traditionally opt for low-risk instruments may find themselves compelled to explore alternative options that potentially offer higher yields.

Changing Investment Landscape

Analysts emphasize that the recent rate cut will pressure low-risk investors to diversify their portfolios. Mr. Vasu Menon, managing director of investment strategy at OCBC Bank, cautioned that while seeking alternative investments could yield better returns, it also introduces greater risk. “With risk comes the possibility of greater volatility and occasional short-term drawdowns in investment value,” he stated. Investors must, therefore, assess their risk tolerance and prepare for potential market fluctuations.

The Monetary Authority of Singapore (MAS) does not set interest rates independently; rather, local rates are influenced by central banks like the Fed. Mr. Glenn Thum, research manager at Phillip Securities Research, noted that Singapore’s interest rates have diverged slightly from global norms due to a recent influx of capital. “A lot of investors are pulling out their US dollars and putting them into Singapore dollars or into Hong Kong dollars,” he explained.

This influx has led to a decrease in the main interest rate benchmark known as the Singapore Overnight Rate Average (SORA), which banks use to price home loans and other financial products. Peter Chia, a senior foreign exchange strategist at UOB Bank, indicated that SORA has already dropped significantly in 2023, driven by abundant domestic liquidity and safe-haven flows. He added, “It may be difficult for SORA to drop further” given the projected Fed rate-cutting cycle.

Interest Rates on the Decline

Interest rates for fixed deposits in Singapore have been on a downward trend since the post-pandemic period. Alfred Chia, CEO of financial advisory firm SingCapital, pointed out that fixed deposit promotions, which previously peaked at around 2.5 percent to 3 percent from 2022 to 2023, have now moderated to approximately 1.5 percent to 1.6 percent per annum for common tenors. In response to these changes, banks have also reduced interest rates for savings accounts.

For instance, UOB announced a cut to its flagship UOB One savings account interest rates effective from May 1, 2023, to align with long-term interest rate expectations. Similarly, OCBC revised maximum effective interest rates for its OCBC 360 account holders in line with prevailing market conditions.

With the Fed’s expected rate cuts, Menon highlighted that fixed deposit rates could become even less appealing for investors relying on them for savings growth. “In a low-rate environment, it makes sense to explore alternative investment opportunities, but investors have to embrace greater risk for better returns,” he noted.

For many investors in Singapore, a cautious approach remains prevalent. According to OCBC’s 2024 Financial Wellness Index, 34 percent of investors are characterized as having a low risk appetite, seeking low returns. This figure has increased by 5 percent from the previous year, while only 7 percent report a high risk appetite targeting higher returns.

Mr. Song Seng Wun, an economic advisor at CGS International Securities Singapore, commented that while the idea of exploring alternative investments may be appealing, it ultimately depends on an individual’s risk appetite. Younger investors, for example, might consider diversifying their portfolios by utilizing online brokerage firms.

“But remember, higher risk, higher return as well,” Song cautioned.

Potential Benefits of Lower Rates

While the Fed’s rate cuts present challenges, there are potential benefits as well. Borrowing costs for households and businesses are likely to decrease. Fixed-rate mortgages are currently available at 1.7 percent to 1.9 percent, a significant drop from over 3 percent a year ago, according to SingCapital’s Mr. Chia. This shift offers homeowners refinancing opportunities, though borrowers are advised to exercise caution and avoid overextending themselves financially.

Businesses may also welcome lower financing costs; however, they must remain vigilant of global challenges such as trade tariffs, geopolitical tensions, and regional economic slowdowns. Chia emphasized the need for both households and firms to balance short-term benefits with long-term financial prudence.

In conclusion, as the Federal Reserve’s interest rate cuts unfold, Singapore investors face a pivotal moment. The decision to explore alternatives requires careful consideration of risk tolerance and market conditions, while the potential for lower borrowing costs may provide some relief in an evolving economic landscape.