Negative Real Interest Rates

A survey of economists of next year's CPI inflation expectations by the Monetary Authority of Singapore showed that inflation is expected to be around 2.9% for 2011. What this means for the typical Singaporean saver is that it could be yet another year of negative real interest rates for his hard-earned savings.

Faced with such a situation, any saver who is serious about protecting his purchasing power will likely be forced to take some risks in having to invest in riskier assets such as bonds, stocks and other asset classes. This also makes saving for retirement more complicated, since CPF interest rates for the Ordinary Account is below the expected rate of CPI inflation.

Also, if home loan rates remain roughly around current levels, the negative real rates may also encourage further price appreciation due to speculation, and this could force the government to come up with another round of measures to cool the property market.

In a negative real interest rate environment, my view is that gold and silver will continue to do well in SGD terms, although likely combined with very high volatility in these 2 markets. As such, it seems possible that next year, just like the current one, savers wanting to protect their purchasing power will have to stomach higher volatility. The faint-hearted are destined to see the value of their hard-earned money erode.

This is most unfortunate. I feel that savers should not be penalised like that. But my opinion on this matter is irrelevant. We just have to be prepared.