Are low interest rates posing a threat to Singapore economy?

The debate rages on whether Singapore should raise the threshold for monetary easing considering that interest rates are now well below their average level during the Lehman crisis.

Frederick Neumann, economist HSBC:

Markets fear the worst. Whether another 2008-style bust comes to pass, remains to be seen. Interest rate cuts are now expected in most Asian economies.

Policy rates, or benchmark rates in the case of Hong Kong and Singapore, are now well below their average level in the third quarter of 2008. This, in itself, should raise the threshold for monetary easing.

In fact, central bankers in Asia have grappled for the past few years with the effects of overly loose monetary conditions.

Easing policy further, even if it provides a little relief in the short term, could provide even bigger headaches later on.

With the exception of Malaysia, the Philippines, and Thailand, interest rates are more stimulative today than in the run-up to the Lehman bust. This suggests that interest rates would not have to fall by as much as in 2008 to rescue growth should another global slump of equal magnitude occur. Don’t bet on Asia cutting rates again hard.

Vincent Conti, economist for emerging Asia, ANZ Research

There is a general consensus that rates in advanced economies will remain at historic lows for a prolonged period, given the slow pace of economic recovery in these areas as well as guidance from their central bank statements.

This means that Singapore rates will stay near the current levels for the foreseeable future as well.

In terms of the possible effects of these low rates on the Singapore economy, these create the potential risk of credit and asset bubbles, such as in the housing market.

However, these risks are being mitigated by other fundamental and policy factors.

Credit growth is gradually moderating as uncertainty about the global economy rises.

Meanwhile, the MAS is cooling the property market via macroprudential measures such as higher taxes on foreign buyers of property, seller's stamp duties on properties sold within a few years of purchase, and lower loan-to-value ratio caps.

Moreover, the major determinants of house prices are still its fundamentals, particularly local demand that moves with employment and wage growth, rather than speculative forces.

Wai Ho Leong, senior regional economist, Barclays Capital

Interest rates are indeed very low here - but that is not something we as an open economy with free capital markets can control.

The exchange rate remains the best monetary policy tool for Singapore given our trade reliance. And even if we get bouts of capital inflows into our asset markets, we can regulate the surges by adjusting prudential requirements appropriately.

The five rounds of property market cooling measures are a case in point. Most recently in last December, the government slapped an additional buyer's stamp duty of 10% targeted at foreign purchases and corporates.

It appears that foreign buying fell sharply in Q1 although interest has started picking up again recently. I won't be surprised to see a sixth round if transactions volume continue to be this high.

Macroprudential measures have their limits of course, especially in such a prolonged period of excess liquidity. Asset price inflation has already spilled over to general consumer price inflation.

As such, the central bank has been tightening the exchange rate policy, that is, allowing a faster pace of SGD appreciation.

In fact, taking both the exchange rate and interest rate into account, overall monetary conditions in Singapore have actually tightened quite a bit post-Lehman.

Andrew Taylor, market strategist, GFT Australia

Singapore currently enjoys an extremely accommodative monetary policy that has seen its rates at a negligible 0.03%. This low cost to borrow has provided Singapore with strong growth and elevated inflation levels.

Many countries would love to have this economic landscape to manage especially a Europe and the US head for another recession.

The balance for Singapore is that their Debt to GDP ratio is at levels that if too large of an interest rate rise were introduced then they could see an unravelling of an overleveraged market.

I believe they do need to start increasing borrowing rates to reel in the inflationary pressures but it would need to be done with minimal raises over time to allow borrowers to adjust to the rising costs.

Justin Harper, market strategist,  IG Markets

Interest rates are already historically low by Singapore standards and critics may argue what another round of cuts will actually achieve.

The local economy is in a pretty healthy state and needs no knee-jerk reaction rate cut to spur growth, unlike other major economies.

Singapore GDP growth is on course for 3% this year which is acceptable given the global economy is facing so many problems, most notably the eurozone crisis.

The local economy has diversified sectors that are producing healthy growth such as electronics and bio-medical. Singapore also has stubbornly high inflation which has remained at heightened levels due to rising food, labour, property and transport costs.

Cutting interest rates may stoke inflation again.

I think cutting interest rates can only have limited impact and are not as effective as other forms of monetary policy easing.

Recently we saw the People’s Bank of China cut interest rates but these are not as effective as reducing the RRR or launching a big infrastructure spend.

The PBOC move to cut interest rates was seen as more symbolic, sending a signal to the markets that it was ready to act to stimulate growth in the sluggish economy.

The actual cut itself will have minimal effect.

Asian economies may feel the need to cut rates to stimulate their economies with such strong headwinds coming from the eurozone crisis. But most Asian economies, including Singapore, are battling with stubborn inflation from rising food, labour and fuel prices.