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Commentary: After the Fed’s rate cut, the impact on Singapore and growth

The fact that the impact might be limited speaks volumes about Singapore's waning reliance on the US, says NUS Business School’s Sumit Agarwal.

Commentary: After the Fed’s rate cut, the impact on Singapore and growth

People taking in the view of the city skyline along Marina Bay in Singapore. (Photo: AFP/ROSLAN RAHMAN)

SINGAPORE: When the United States Federal Reserve moves on interest rates, the markets listen with bated breath.

That was the case when Fed Governor Jerome Powell recently announced a rate cut for the first time since December 2008, reducing its key overnight lending rate by a quarter of a percentage point. And he may not be done yet.

Disappointing economic data from China and Germany fuelled fears of a mounting recession, prompting traders to plow money into ultra-safe US government bonds. This puts the Fed under even more pressure to cut rates further.


In the past, the Fed lowering interest rates was always a good indicator of economic growth for Singapore. 

READ: After another cut in Singapore’s GDP forecast, what could happen next? Experts weigh in

This is because when US interest rates go down, the average American consumers have more money to spend overall and their spending habits change.

This may mean a higher demand for imported goods and thus an increase in trade with an export-driven economy such as Singapore.

About 20 years ago, such trade and investments from US played a crucial role in Singapore’s GDP growth. However, with the rise of regional investment from Australia, China, India and Indonesia, we are seeing a shift in Singapore’s economic relationship with the world’s largest economy.

These regional economies have established themselves as important partners for Singapore in terms of currency, trade and economic and financial collaborations. As a result, the island state’s reliance on the US has decreased significantly.

This decoupling in reliance on the US will continue as geopolitical issues such as Brexit, rising trade tensions, immigration and an increase in right-wing politics drive investors to Asia.

Investors cheered the US decision to delay levies on a range of Chinese goods, which has raised hopes the two sides can reach a trade compromise. (Photo: AFP/Ina FASSBENDER)

Generally, investors become nervous whenever the Fed lowers rates as they see it as an indication of something amiss with the US economy.

However, while a rate cut may be perceived as a bane for the US economy, the impact on Asia and Singapore in particular, is less obvious.


Stocks in both the US and Asia fell in reaction to Powell’s hawkish announcement – a reflection of investor anxiety in the equity markets. However, in the longer term, the rate cut may present a greater opportunity for Asian markets. 

This is because American investors, who now cannot earn as much in the US markets, may shift their investments to regions where markets are doing well. We are already seeing evidence of investors going into bonds or looking for higher returns in developing countries.

In fact, this past week saw 10-year government bond yields in the US and UK markets dipping below those of shorter-maturity debt for the first time since the 2008 financial crisis.

However, small economies such as Singapore may not see much impact in the long term should American investors choose to invest their money in Asia.

While we should not be too concerned with Fed rate cuts yet, we should be cognisant about economic developments in our part of the world.

Economies in Asia are booming. Although growth figures are lower than expected, the twin drivers of growth in this region are still doing well compared to their global counterparts. India is expected to grow by 7 per cent, while China’s economy is predicted to expand between 6 to 7 per cent.

READ: Huge investments and 5G super highways. How China is powering ahead in the network race, a commentary

Given the current geopolitical and economic climate, there will be volatility in worldwide markets.

For instance, China recently devalued its currency, India abolished the special status for the state of Kashmir, while the protests in Hong Kong brought the city to a standstill. All are significant economic and political events with ramifications on world markets and currencies.

This photo illustration taken on August 13, 2019 shows Chinese 100 yuan notes in Beijing. (Photo: AFP/FRED DUFOUR)

If important economies such as China and India see a downturn, sectors such as trade, tourism and education will be affected. 

Thus, while Singapore needs to be mindful of US fundamentals, it should also keep a close eye on regional challenges and monitor the monetary and fiscal policy changes of its neighbours.

When this happens, regulators in Singapore should take actions to ensure that the contraction is limited both in magnitude and duration. To counter such contractions, the Government could provide fiscal stimulus to spur consumption and investments in Singapore.

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It is a premature and farfetched idea to think that lower rates will boost the housing market in Singapore. For one, banks have priced in these moves and have begun trimming home loan rates as early as April.

Still, when there is an interest rate cut, there is very little incentive for banks to change their lending portfolio rates quickly, including mortgages and credit cards.

READ: After Fed’s rate cut, where are Singapore interest rates and home loans headed?

This is because the Fed funds rate is only moving the daily short-term rate, while the rates that the banks are charging is for a 5-year lending rate for auto loans and 15-year rates for mortgages. To move from daily rates to 15-year rates for example, the change to long-term lending rates may only be between two and five basis points.

In addition, the majority of the lending and savings products offered in Singapore are tied to inflation and inflation is still very low. Singapore inflation is not necessarily correlated with the US market.

While the Fed lowering its rates can influence the Singapore Interbank Offered Rate (SIBOR) indirectly, any changes to lending products involve a long and complicated chain of events before consumers are affected. It is not a frictionless change when the US Fed lowers interest rates.

File photo of a row of ATMs in Singapore. (Photo: Jeremy Long)

In contrast, when there is a rate hike, banks tend to act faster to adjust their lending rates because they are losing money on their consumers.

Together, these changes in the US economy brought about by a cut in the Fed rate are likely to have minimal impact on Singapore.

Sumit Agarwal is the Low Tuck Kwong Distinguished Professor of Finance, Economics and Real Estate at NUS Business School. He has also worked at the Federal Reserve Bank of Chicago as a senior financial economist. He is also the author of Kiasunomics. The opinions expressed are those of the writer’s and do not represent the views and opinions of NUS.

Source: CNA/sl


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