Impact of US Federal Reserve Rate Cut on Singapore's Economy and Steps to Manage Volatility in Property Sector
Ministry of FinanceSpeakers
Summary
This question concerns the impact of the US Federal Reserve’s interest rate reduction on Singapore’s mortgages, retirement adequacy, and business borrowing, as raised by Mr Saktiandi Supaat. Deputy Prime Minister and Minister for Trade and Industry Gan Kim Yong responded that domestic interest rates are expected to decline, with the three-month compounded Singapore Overnight Rate Average projected to reach 2.5% by end-2025. He noted that while easing rates benefit borrowers, the Government will maintain cooling measures like Additional Buyer’s Stamp Duty and Loan-to-Value limits to ensure property market stability. To safeguard retirement savings, the Government has extended the 4% interest rate floor for Special, MediSave, and Retirement Accounts through 2025, alongside the 2.5% Ordinary Account floor. Finally, the Minister advised households and businesses to exercise financial prudence when borrowing, given significant economic uncertainties from geopolitical tensions and trade frictions.
Transcript
26 Mr Saktiandi Supaat asked the Prime Minister and Minister for Finance (a) what are the Government’s short-term and medium-term concerns and expectations arising out of the US Federal Reserve’s 50-basis-point reduction in its key lending rate in relation to issues, including (i) home mortgages, (ii) retirement adequacy and (iii) business borrowing in Singapore; and (b) what steps is the Government taking or considering to quell any knee-jerk reactions to the cut in lending rate, especially in the property sector.
Mr Gan Kim Yong (for the Prime Minister): Globally, interest rates have started to ease as inflation has fallen from decades of high levels. Core inflation in Singapore has also moderated substantially from its peak in early 2023, which was the highest in close to 15 years. Domestic interest rates are expected to ease, along with global interest rates. Financial markets currently expect the three-month compounded Singapore Overnight Rate Average to decline from 3.3% to about 2.5% at end-2025.
The reductions in global and domestic interest rates are expected to benefit existing mortgage borrowers. For example, fixed rate packages fell from the peak of about 4.5% in end-2022 to about 3% in the first half of 2024. For those who borrow from the Housing and Development Board, interest rates have remained unchanged since July 1999 at the lower rate of 2.6%.
The Government’s objective is to promote stability in the property market. Measures, such as the Additional Buyer’s Stamp Duty, Loan-to-Value limits and Total Debt Servicing Ratio, remain in place and will continue to restrain property demand.
On retirement adequacy, Central Provident Fund (CPF) members are protected against the risks of low market interest rates by interest rate floors provided by the Government. CPF Ordinary Account has a 2.5% interest rate floor, while the Government has extended the 4% interest rate floor for CPF Special, MediSave and Retirement Accounts for another year from 1 January to 31 December 2025.
Borrowing costs for businesses are also expected to decline. Banks in Singapore have the capacity to lend, supported by lower funding costs and strong financial positions.
While the turn in the global monetary cycle may lift sentiments, the economic outlook is subject to significant uncertainties from geopolitical tensions and trade frictions. Households and businesses should continue to exercise financial prudence when borrowing.