The Beginner’s Guide: Understanding falling savings account interest rates

You might have seen a couple of buzzwords in the news headlines as of late (other than COVID-19, of course) — signs of recession creeping in from all corners of the world, stock markets becoming even more volatile than before, businesses struggling to stay afloat, and of course news about the Fed lowering their interest rates to 0%. Unfortunately, our sunny island isn’t spared from this economic downturn.

With so much uncertainty and negative sentiments in the market, what does that mean for those with savings accounts? Well, you might start to see revisions being made to the amount of p.a. interest you earn. To help give you a better understanding of what exactly is going on, and why it happens, we’ve broken down all the information you need to know!

The Role of the Central Bank

To understand how and why your savings account interest rates are affected by the economy at large, you must first understand the role of the Fed in the United States. In times of an economic downturn or impending recession, the Fed will cut their interest rates in order to stimulate the economy. With the US market being a major player in the world economy, when the interest rates drop, you will soon start to see the same effect occur worldwide.

At this point you might be wondering, “So how and why does the US economy affect my interest rates?” Well, this is because of how our economy operates on a macro level. Our version of the Fed is known as the Monetary Authority of Singapore (MAS). Generally speaking, MAS manages all things related to the economic growth of Singapore. And unlike other central banks in the world, MAS uses the exchange rate instead of interest rates in order to manage economic growth. What this means is that our interest rates float at a level that is set by the global economic environment, which is typically determined by the US interest rates amongst other indicators. So with the Fed’s recent cut in interest rates, our rates naturally saw an accompanying decline.

When the interest rates drop, borrowing becomes more attractive not just for businesses, but also for banks who borrow and lend from each other (also known as the Federal Funds Rate), helping to stimulate the economy. While it might seem like good news, a drop in interest rates also means that the total profit banks receive also sees a slight dip. With this dip in profits, what does it mean for banks further down the line?

The Role of Banks

Before we can answer that question, we must first understand the fundamental role of a bank. As we know, the way banks traditionally earn money is by borrowing and lending. In this case, banks will pay an interest to depositors who leave their money with them. At the same time, the banks will take these funds from the savings accounts to lend to businesses at higher interest rates. What the bank essentially receives as revenue as a result is known as the spread, or the bank’s margin. With the drop in interest rates provided by the Central Bank, they are then expected to pass this cost-savings on to their clients as well. However, when the interest earned from lending to businesses falls, the bank would then have to readjust the interest that is being paid to their depositors in order to maintain the business.

Enter savings accounts. Here’s where you, as the everyday consumer, come into the picture.

If you’ve been in the market for a good savings account that suits your lifestyle and needs, you’d realise by now that it is saturated – with players looking to attract as many customers as they can. And how do they do this? By issuing attractive interest rates, with some going up to almost 2%*! But if banks are also charging interest rates of 2% on businesses who borrow, and yet still offer high savings account interest rates, it would mean that the bank would see a drop in profits.

Should you do anything?

The short answer is no. While we may not know how long these lowered rates will last, take comfort in the fact that this dip in your savings account’s interest rates is not permanent. In fact, if you look at historical SIBOR rates^, the interest rates (while on a steady decline over the years) tend to fluctuate in accordance to market conditions.

If this economic downturn has got you thinking about your finances, fret not. The banks offer a wide range of products and services that you could consider as long-term alternatives to a savings account, which tends to be more ideal for short-term financial goals. For instance, bonds, stocks and ETFs are some areas that you can start exploring.

Conclusion:

In the meantime, try to find the silver lining in all that’s happening in the world. Perhaps, this can help nudge you along as you seek to explore different forms of passive income, helping you jumpstart your journey into a world of greater financial literacy!

Disclaimers:

This article has not been prepared for any particular person or class of persons and it has been prepared without regard to the specific investment objectives, financial situation or particular needs of any person, and does not constitute and should not be construed as investment advice nor an investment recommendation. You should seek advice from a licensed or an exempt financial adviser on the suitability of a product for you, taking into account these factors before making a commitment to purchase any product. In the event that you choose not to seek advice from a licensed or an exempt financial adviser, you should carefully consider whether the product is suitable for you. Standard Chartered Bank (Singapore) Limited (the “Bank”) will not accept any responsibility or liability of any kind, with respect to the accuracy or completeness of the information herein. The Bank makes no representation or warranty of any kind, express, implied or statutory regarding this article or any information contained or referred to in this article. This article is distributed on the express understanding that, whilst the information in it is believed to be reliable, it has not been independently verified by the Bank.

Singapore dollar deposits of non-bank depositors are insured by the Singapore Deposit Insurance Corporation, for up to S$75,000 in aggregate per depositor per Scheme member by law. Foreign currency deposits, dual currency investments, structured deposits and other investment products are not insured.

This article is brought to you by Standard Chartered Bank (Singapore) Limited. All information provided is for informational purposes only.

*Excludes high-yield savings accounts, and only refers to savings accounts with no additional criteria.

 ^Singapore Interbank Offered Rate (SIBOR) is a reference rate based on interest rates used by banks in Singapore to lend unsecured funds to one another.