ST Forum Letter (rejected): Time to tackle inflation by allowing interest rates to rise

March 3, 2008 by admin
Filed under: E-Jay's Corner, Inflation 

ST Forum Letter

Written by Ng E-Jay
23 Feb 2008

Status: REJECTED

Most Singaporeans are keenly aware that rising inflation has hit their pockets hard.

Trade and Industry Minister Lim Hng Kiang announced last November that the overall inflation rate could hit as high as 5 per cent in the first quarter of this year. Last week, the Monetary Authority of Singapore (MAS) increased its forecast for inflation even further, predicting that consumer prices will gain at more than double the 2007 pace.

As high inflation erodes consumers’ purchasing power and makes retirement planning that much more difficult, it is urgent that inflation be tackled here and now.

While MAS has gradually allowed the Singapore dollar to appreciate to the high end of its S$NEER policy band to combat inflation, this has been clearly insufficient as prices are still rising rapidly.

The export sector is now one of the weaker parts of Singapore’s economy due to the strong Singapore dollar, but domestic demand is still booming, which has added to inflationary pressures. The strength of the domestic market and the bull market in asset prices such as property in Singapore have been further fueled by large inflows of foreign funds which are attracted by our strong dollar and stable economy.

The more sensible approach therefore is to limit the appreciation of the Singapore dollar while raising interest rates to combat inflation.

In January this year, we witnessed the curious phenomenon where the three-month Singapore interbank offered rate (Sibor) hit a multi-year low of 1.76 per cent despite rising inflation. The yield on the 10-year SGS bond is also near record lows. Since the interest on CPF SMRA accounts will be pegged to prevailing interest rates, this has raised concerns that CPF returns will fail to keep up with inflation should interest rates continue to remain low.

I am of the opinion therefore that there is an urgent need to allow interest rates to rise so that inflationary pressures can be dampened and CPF accounts can earn a higher interest, thereby preserving the purchasing power of members’ savings.

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Comments

7 Comments on ST Forum Letter (rejected): Time to tackle inflation by allowing interest rates to rise

  1. LuckyTan on Mon, 3rd Mar 2008 8:24 pm

    2. OMG, interest rate rise? You know how many people servicing housing loan will end up paying more. Higher monthly installment on homes will be an even bigger burden on household.

    Right now our inflation is in food and energy. You can increase interest rate all you want and you cannot bring the price of these down.

    The letter deserves to be reject for stupidity.

  2. admin on Tue, 4th Mar 2008 1:09 am

    3. Dear LuckyTan,

    Raising interest rates would reign in the rapid escalation of property prices. Hence will it would be true that homebuyers would make more monthly payments per dollar amount of mortgage, the impact of the rate rise would be dampened by the more subdued rise in prices of property. Since homebuyers generally employ fixed interest rate mortgages, their monthly capital outlay is roughly known at time of purchase, and they do not suffer from future increases in interest rates.

    Raising interest rates would also moderate the booming domestic market and play a part in helping keep a lid on inflation. By shifting from a currency to interest rate region, we also allow our weak export sector a chance to recover.

    But your point is still valid, in that our inflation comes from food and energy. Raising interest rates will do nothing here. Instead we should eliminate GST on essential food items and utilities. That would be far more sensible, pragmatic, and workable. Hmmm … the letter was stupid indeed :-P :-P

  3. admin on Tue, 4th Mar 2008 1:10 am

    4. Comment (2) correction: The phrase “interest rate region” should be “interest rate regime”.

  4. Bubble on Tue, 4th Mar 2008 3:03 pm

    5. Did the govt not say that the recent spike in inflation was due to elevated property prices?
    Asset prices may be hurt if interest rates are raised and the rich that bought properties in the last cycle will surely be hurt badly. If you subscribe that more FT’s/Rich bought, then you may want interest rates to go up.

    However, we are all suffering negative returns on savings on a interest rate curve that is below inflation rate. This is damaging to real savings providing a double-whammy to the man in the street and does not help him as his earnings on savings cannot help him mitigate inflation. This I have issue with.

    Perpectuating artificially a low interest rate environment in a high inflation scenario is tantamount to creating an asset bubble. So who has alot of property and has vested interests here will want it kept low.

  5. admin on Tue, 4th Mar 2008 6:46 pm

    6. Dear Bubble,

    The recent spike in property prices is a symptom of excessive liquidity, but not the root cause of our inflation woes. It is excessive liquidity coupled with soaring food and energy prices that is the root cause of most of the inflation we are experiencing.

    The way to help the man in the street is to allow CPF interest rates to rise without compromising on mortgage payments.

    E-Jay

  6. xtrocious on Wed, 5th Mar 2008 11:03 am

    7. In theory, yes, we should raise interest rates to combat inflation i.e. to reduce demand to allow the economy to cool down…

    However, in practice, it is not so easy – there will always be vested interest (forgive the pun), especially from the recent property boom…

    Even if we cast that aside, raising interest rates will probably help if the inflation was mainly asset driven…

    But in this case, we are facing inflation in basic necessities…even if you raise interest rates, food prices are not likely to come down…nor do we expect demand cos if you have to eat, you have to eat…

    Coming back to housing loans – a lot of the banks have the “right” to adjust their loan rates even if the borrowers were on a fixed rate package…so this would definitely eat into their disposable income if they do so – good if you want to cool the economy but with a very real threat that the global economy could go into recession, that is not such a good idea…

    And faced with higher food and fuel (utilities) prices, that is definitely not a good thing…

  7. Daily Sg: 4 March 2008 « The Singapore Daily on Fri, 7th Mar 2008 8:57 pm

    8. [...] Singaporeans are fed, up with progress! – Sgpolitics.net: ST Forum Letter (rejected): Time to tackle inflation by allowing interest rates to rise [...]

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