Inflation in Singapore and how Singaporeans can be encouraged to save and get more returns on their savings

Date: 10 January 2011

Parliamentary Question for Oral Answer:

Ms Irene Ng asked the Minister for Finance with inflation at its highest level since January 2009 and expected to rise in 2011, (a) what will be the impact on Singaporeans on low or fixed incomes, such as retirees, and what can be done to assist them to cope with the cost of living; and (b) how Singaporeans can be encouraged to save, given the low returns on savings from banks.

Mdm Ho Geok Choo asked the Minister for Finance (a) what is the outlook for interest rates in Singapore for 2011; (b) what percentage of the population above 55 years old have only saving deposits as their assets, apart from their homes; and (c) what can be done to help this group of people to get more returns on their savings.

Reply by Finance Minister Tharman Shanmugaratnam:

1. Ms Irene Ng referred to the impact of higher inflation on Singaporeans. CPI inflation for November 2010 was 3.8 percent (year-on-year), bringing the average over January to November to 2.7 percent. It is expected to rise further in the first quarter of this year, before moderating in subsequent quarters.

2. However, about half of the 'headline CPI inflation rate' over the last year has been due to a single factor - the sharp rise in COE premiums. This CPI increase hence does not mean a similar increase in actual cash outlays by the majority of Singaporeans, as only 3-4% of households (7% of car-owners) purchased new COEs in 2010. The majority of car-owners hold existing COEs. If COE premiums stay high, everyone who purchases a new car or renews a COE will eventually face this higher price. However, the purchases will take place over a period of years. Hence, the impact on cash outlays for households as a whole will be spread out over a few years.

3. Excluding the recent increase in COE premiums which contribute significantly to the 'headline CPI inflation rate', inflation during January to November 2010 was around 1.3%. It was due mainly to increases in prices of various foods and oil-related items in the household consumption basket. These price increases reflected weather-related disruptions in food supply from abroad, increased demand in emerging countries such as China, and the uptrend in global oil prices. These external factors will unfortunately continue to impact us and are likely to raise domestic prices further in the coming months.

4. The best way to help Singaporeans to manage these increases in the costs of living is to grow the economy in a sustainable way and raise our skills, so as to help wages grow. That remains our central strategy.

5. However, for households who are not earning any income from work, including most elderly households, inflation is always a problem. The Government is mindful of the problems these households face, and has provided them with significant assistance over the last year - in fact exceeding the increase in costs of living they have faced. Take for example a retiree couple, living in a 3-room flat. They would have received a total of $1,200 in benefits last year. This would have exceeded the total increase in costs that such households would have faced as a result of rising food, utilities and other prices. If they were living with children or a child who is low income earner, the assistance provided by the Government would also be considerably greater, as the household would have received Workfare Income Supplements. The WIS supplement would have gone to working child if he or she was of a low income.

6. This approach will continue in the upcoming Budget. The Government will take into account the impact of inflation and the needs of low income and retiree households when considering further transfers.

7. Ms Irene Ng and Mdm Ho Geok Choo had also asked about the outlook for interest rates and what can be done to help Singaporeans, especially the low-income and elderly, get more returns on their savings. The current low level of interest rates reflects loose global liquidity conditions. We do not make official forecasts of interest rates, but market analysts believe that this low interest rate environment could persist for a while in view of the still weak recovery of the US and other developed economies.

8. However, low income savers in Singapore are in fact less affected by bank deposit rates than our CPF interest rates. Apart from the homes they own, the homes they live in, CPF savings are the main source of retirement funds for low and middle-income Singaporeans.CPF interest rates are currently significantly higher than bank deposit rates^[1]. This is especially so for the first $60,000 of a member's balances, which currently earn an interest rate of 3.5% if the money is in the Ordinary Account, and 5% if it is in the Special, MediSave or Retirement accounts. So 3.5% and 5% in your CPF account for the first $60,000 which is significantly above bank interest rates.

9. For Singaporeans who do not have significant spare savings - which includes many of our retirees - it remains best for them to keep their investments simple and conservative. It has been and remains unwise for them to seek higher returns by investing in high risk assets. As Members know, through the MoneySENSE financial education programme, we have been seeking to help more Singaporeans plan for retirement and invest their spare savings prudently.

10. Our capital markets are also developing, and offering more investment alternatives. These include instruments that offer better returns than savings deposits, but without overly high risk. Retail investors can now participate in Singapore Government Securities (SGS) auctions via ATMs of the 3 local banks.  By the middle of this year, they will also be able to buy and sell SGS on the SGX. Well-rated corporate bonds are also becoming more widely available, as high quality corporate borrowers are turning more to the bond market to meet their financing needs. Some of these companies have begun to issue bonds aimed at retail investors, and we can expect this to be a growing trend in coming years.

^[1] All CPF balances earn a minimum risk-free interest of 2.5 per cent guaranteed by the Government; with Special, MediSave and Retirement Account savings (set aside for healthcare and retirement needs) earning a guaranteed minimum 4 per cent interest until end Dec 2011. In addition, an extra 1 per cent interest is paid on the first $60,000 of a member's combined CPF balances. These rates are significantly higher than the current low bank deposit rates.