Prime rate cut seen as no elixir for S’pore economy

  • Business
  • Thursday, 20 Feb 2003

SINGAPORE’S first prime rate cut in 17 months could deliver a minor boost to car and home purchases, but most experts doubt the surprise 25-basis-point easing will hasten economic recovery. 

The cut in DBS Group Holdings’ benchmark lending rate to 4.25% early this week also highlights weak lending conditions as Singapore shows scattered signs of economic recovery after its worst downturn since 1964, analysts say. 

“The impact may not be large at the moment given uncertainties in growth outlook, but it will make a rebound more powerful when the global outlook firms up later,” said Xin Xie, Asian economist with Bank of America. 

Bank credit remains soft in Singapore and many consumers are very reluctant to spend or plough money into the real estate market despite three years of falling property prices. 

The cut in prime rates – at which banks lend to their best customers and a benchmark for consumer loans – is expected to immediately lead to lower rates for housing and car loans, delivering a slight boost to small businesses and retailers. 

“Lower interest rates always have a positive impact on demand for funds, except in rare situations,” said Xin. 

New housing loan rates are usually fixed for the first few years and then shift to a formula linked to the prime rate. 

DBS already has Singapore’s lowest prime rate and its cut is expected to trigger a round of cuts by other big Singapore banks. 

United Overseas Bank and OCBC Bank – both with 5% prime rates – would likely shave rates soon to protect their home-loan market share, analysts said. 

“This intensifies price competition in the housing and auto finance markets and should lead to OCBC and UOB following suit,” Barclays Capital said in a note to clients. 

Singapore enjoys one of the world’s highest per-capita savings rates. Workers stash up to 36% of their salaries in the compulsory Central Provident Fund and typically channel the money into housing. 

But many are clamping down on their wallets, confronted by a structural rise in unemployment as the city-state shifts to high-end electronics and knowledge-based industries such as biotechnology and pharmaceutical production. 

This has left many banks flush with deposits at a time when lending is shrinking, causing an erosion in bank margins. 

Analysts say DBS, with the largest deposit base among Singapore’s big three lenders, would benefit from cutting interest and deposit rates concurrently. Gains from the cut in interest-rate costs on deposits more than outweigh the lower interest received from prime rates. – Reuters  

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