HAPPY NEW YEAR! As we work on our New Year's resolutions, it would be prudent to have an eye on the world economy. 2016 is set to be exciting year for financial markets. After almost a decade of low interest rates, the US Federal Reserve finally raised its key interest rate by 0.25%. This may seem a pretty small rise, but it has huge implications for the world economy. In the first article of 2016, we examine how raising the interst rate will affect us directly in Singapore.
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What: Borrowing rates on big ticket items such as mortgages and cars will go up.
Implications: We will need to pay higher interest on our loans. However, if our flat is financed with a HDB loan, this will not really affect us, as the HDB loan rate is expected to remain at 2.6%.
Action: If we’re considering buying a new house or car, it may be time to make those big decisions. If our house is on an adjustable rate loan, we might want to consider refinancing to a fixed rate one. It is also time to seriously implement a plan to reduce and pay off our creditcard debt.
What: Savings Deposit rates will likely start to inch up... in the long term.
Implications: There’s no need to break out the champagne yet. Banks have made it clear that deposit rates will not be raised immediately. It takes time for banks to earn back a profit on the loans that have been enjoying low interest for such a long time. However, deposit rates are expected to improve over the long run.
Action: Bank deposits are still not a good place to park our money if we want to match or beat inflation. There are other instruments that would give a better return over the long run. Speak to a qualified Financial Services Consultant, or be prepared to be patient.
What: The volatile stock market will get even bumpier.
Implications: If we have investments in stocks, bonds or other investments, we can expect a bumpy ride as the markets adjust to the reduced stimulus. The days of double digits gains of the past five years or so are likely to be over. It is even very likely that many of our portfolios may shrink.
Action: Invest for the long term and plan for market volatility. Have a diversified portfolio and stay invested. Implement strategies to take advantage of the ups and down; such as Auto Fund-rebalancing. Remember, in every crisis (and we’re not even there yet), there is opportunity.
What: The USD is likely to continue to strengthen.
Implications: Expect to spend more when holidaying in the USA. Products and goods from the USA will also be more expensive. These include products bought online through portals such as Amazon or those who transact in US dollars. Studying and living in the USA would also be more costly.
Action: Make sure to factor in the exchange rate before going on a spending spree in US dollars. We should also be prepared to pay more when our creditcard expenses are charged and converted from US dollars. If we’re planning to send our children to the USA for studies, we should factor in the expected appreciation of the US dollar into our financial planning.
In conclusion, the raising of US interest rates will affect Singapore. Furthermore, the Singapore economy is affected by not only what goes on in the USA, but also other big players such as China and Europe. We should be aware and prepared for the changes that will come.
