Asset-bubble vigilantes will find little to cheer about with Singapore’s falling interbank lending rate.
They will be partly right: Cheaper capital is about the last thing the island’s frenzied property market needs.
According to official statistics, housing loans by Singapore banks reached $64.3 billion in March. That’s the highest on record.
With prices of private homes surging the most in seven years in the first quarter, and with rents having climbed to levels not seen since 1998, it isn’t surprising that more people are rushing to take out mortgages.
The trend may amplify if borrowing costs fall. Singapore yesterday reported that the economy expanded at a faster-than-expected annualised 7.6 per cent pace in the first quarter. The momentum is coming from a revival in construction, which grew at its briskest rate in nine years.
Singapore will have two casinos by 2010; the Public Utilities Board is going all out to turn the city’s reservoirs and canals into hotspots for kayaking and waterfront living. Formula One racing is coming to the central business district.
It’s a perfect backdrop for a property boom to run ahead of itself. Indeed, not a day passes without news of an older block of apartments being torn down to be replaced by newer construction. The resulting supply shortage is squeezing the expatriate population – most locals live in public housing – by pushing up rents even further.
Yet, it isn’t stopping a steady inflow of new arrivals. Land-owners are dizzy with excitement.
All of this begs the question: Shouldn’t monetary policy be playing a cautionary role by leaning against the wind?
The Monetary Authority of Singapore (MAS) doesn’t manage interest rates. It buys and sells the local dollar to keep it anchored against an undisclosed basket of trading partners’ currencies.
The monetary stance, since April 2004, has been one of “modest and gradual appreciation” in the home currency.
Rather than remove the additional liquidity from the banking system by selling bonds and bills, which is what other Asian central banks do to maintain control over money supply in the face of strong capital inflows, the Singapore monetary authority follows a more hands-off approach.
That’s because domestic money supply doesn’t have much of an impact on consumer-price inflation on the island. The annual inflation rate has been less than 1 per cent for eight straight months now, even though money supply growth has steadily accelerated to reach almost 23 per cent in March, compared with 8 per cent a year earlier.
From an asset-bubble perspective, the strategy isn’t without its risks.
“Sustained liquidity expansion could exert undesirable macro effects in the medium term,” Mr Yen Ping Ho, a JPMorgan Chase & Co currency strategist, said in a May 18 note. “While inflation remains low, rising financial asset prices and booming housing activity should increasingly be a source of concern.”
There is talk that Singapore is intentionally targeting lower interest rates because it wants to avoid becoming a target of carry traders by offering them high yields.
MAS has issued a clarification, denying that the fall in local interest rates was deliberate. “MAS does not manage interest rates,” the central bank said in an e-mailed statement. “Recent movements reflect market forces.”
Those who believe all central banks should be in the business of pricking bubbles will find MAS’ stance unsatisfactory.
But MAS will be prudent to react only if runaway asset prices spill over into consumer prices. That is what it did between 1991 and 1994.
Capital is under-priced on a global scale. A small, open economy like Singapore can’t buy insurance against an eventual return of financial risk. Asset-bubble vigilantes should look elsewhere.
Andy Mukherjee is a Bloomberg News columnist. The opinions expressed are his own.
Source: Today, 23 May 2007
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