With the onslaught of massive rate cuts by central banks worldwide, interest rates are heading south. The Singapore Swap Offer Rate (SOR) responded by falling from 1.4% to the 1% level, despite USD moving up against SGD. The gain in USD/SGD exchange rates were moderate, though. Perhaps we were just moving out of the forward rates window where the USD is forecasted to advance.
In similar fashion, Sibor has been falling through the week, guided by the global decline in rates and possibly a falling demand for money as well. The Straits Times reports that people are waiting for further drop in prices of properties even though it has already fallen by 25 percent in some places. I suppose this sounds like a mixed bag of good and bad news for mortgagers – savings from lower interest rates but deflated housing price.
Now the flip side of the story. There could be a bubble that is building up in the bonds market. There is a boom in the bonds market due to flight to safety. At the same time, governments around the world are selling bonds to raise cash to fund their stimulus plans. “When bond markets are saturated, investors cherry pick the strongest issues, obliging weaker countries to offer higher rates that increase their financing costs.” And “if governments pay higher and higher rates to secure the money needed to fund their stimulus plans, they inevitably push up wider interest rates”. Rate increase may be a good thing in view of another problem that could be worse: inflation.
Indeed, “central banks may even buy up existing bonds”, doing so by printing money. “The bottom line is that the only way to get out of this recession is to spend a lot of money on stimulus and dump a lot of money into the economic system. That means there will be inflation for a long period of time”.
So which of the two is the worse evil – depression or inflation? Perhaps depression is, judging by the images associated with it (vs inflation). Here is a quotation worth pondering about: “The love of money is the root of all evil“.