Explainer: Why are banks raising interest rates for savings deposits and should you open a new account to cash in?

SINGAPORE — As interest rates on borrowing here and around the globe rise rapidly to combat inflation, the grim news for home buyers facing heftier mortgage bills is good news for bank customers with savings deposits.

Again this week, Singapore banks have been raising interest rates to stay competitive in the fight for deposits.

DBS, the country's largest bank, on Tuesday (Nov 1) raised the interest rate again for its flagship Multiplier savings account from up to 3.5 per cent to up to 4.1 per cent a year on the first S$100,000 in a customer's account. It last raised interest rates for its Multiplier account in August.

The rules around the Multiplier account can seem daunting. To earn the full 4.1 per cent interest, a customer must carry out S$30,000 or more in eligible transactions a month, and credit their salary, dividends or Singapore Financial Data Exchange (SGFinDex) detail to the account. 

OCBC earlier this week also increased interest rates for its 360 savings account to an all-time high of 4.65 per cent a year on the customer’s first S$100,000, up from 1.85 per cent.

That rate comes with some strings attached, too. The customer must have at least S$1,800 of salary credited via the interbank facility Giro monthly, must increase the deposit by S$500 a month and must spend at least S$500 monthly on certain OCBC credit cards.

Last August, United Overseas Bank (UOB) announced higher interest rates for its flagship savings account. In response to TODAY’s queries, the bank said that it is constantly reviewing its deposit rates to ensure they remain competitive in view of market developments. 

One analyst noted that the last time interest rates soared this high was about 15 years ago, right before the global financial crisis in 2008, when Asia’s exports and growth plummeted due to severe recession in major economies.

TODAY takes a look at how much higher can these interest rates go and what it means for lenders and consumers. 

WHAT DO HIGHER INTEREST RATES MEAN?

Mr Christopher Gee, head of the governance and economy department at the Institute of Policy Studies, said that the business model of a retail bank is to take in deposits, usually from depositors, for a period of one to 12 months, though the durations can sometimes be longer.

The banks then take these deposits and lend the money to borrowers, such as home buyers for their mortgages or businesses for investments.

In short, the banks “borrow” from their depositors for a given period of time — typically less than a year though sometimes longer —  and lend the money to others, often for a longer term.

Broadly speaking, the banks make money from the difference between the interest rate they charge borrowers and the interest rate they give depositors, less their overhead costs such as wages and utilities.

Though it is difficult to predict when the interest rates here will stop rising, Assistant Professor Aurobindo Ghosh who is a finance lecturer in Singapore Management University, said that it will tend to happen in tandem with the trajectory of interest rates across most major economies.

And given the expectation that borrowing rates in these major economies will continue to rise this year until inflation is under control, the interest rates in the banks here will most likely follow suit, he added.

WHAT'S IN IT FOR BANKS?

This is the first time in a long time that Singapore is seeing savings interest rates that are higher than loan interest rates. So how are banks making money from this?

Experts said the fact that loan interest rates have also been creeping up helps to bring in more profit for the banks, which then allows them to provide higher returns to depositors.

Additionally, Professor Walter Theseira, Associate Professor of Economics, Singapore University of Social Sciences explained that banks compete for depositors not so much for their savings money itself, but rather for the banking relationship they can get out of these customers.

“This has characterised modern banking in Singapore for the past decades," he said. "Essentially, banks want to establish a relationship with depositors by engaging them in other banking products such as advice on wealth management, insurance, and high volume lending, which are more profitable than fixed deposits.” 

Getting potential depositors to open new bank accounts and deposit their savings is a way for banks to “lock in” customers into a banking relationship, so that the bank can market more profitable products to consumers, he added.

This also explains the requirements that banks set for new depositors who want to benefit from the full high interest rate on their savings accounts, he noted.

“Banks don’t care how much you deposit into your account but they care about you performing all activities through banks," Prof Theseira said.

 That’s why elements (of setting up a new savings account) are carefully designed to include requirements such as crediting salaries, using the bank’s credit cards continuously, and fulfilling spending requirements.”

SHOULD CONSUMERS MOVE SAVINGS TO BANK WITH HIGHEST INTEREST RATE?

Analysts approached by TODAY said that it is up to the individual to seek the best possible rate available to deposit their money, but there are some considerations they can take into account. 

Ms Daphne Lye, who heads the solutions team at financial advisory platform MoneyOwl, said that it is difficult to predict interest rate movements, but consumers do not need to get their forecasts right in order to make sound financial planning. 

“We do not recommend hopping between different savings options based on the latest promotion rates but staying with one or two banks that meet most of a consumer’s banking needs, such as salary crediting or daily spending.

“The high-interest accounts can be quite complicated. Often, to access the higher tiers, you are required to buy products or may come under pressure to do so," she said.

Mr Timothy Ho, editor of the website DollarsAndSense, said that banks will tend to raise rates most notably on a "tactical, promotional basis" such as fixed deposits or OCBC's 360 account and DBS' Multiplier account.

He added that "base rates" on regular savings accounts will not move so quickly, and when they do, they will move by less significant margins.

"That said, most people who put their savings in such accounts are usually not looking to earn returns from their savings anyway," he said.

Asst Prof Ghosh said that depositors should take into account the conditions imposed by the banks, such as the duration and amount of money they will hold. 

“The interest rates could be attractive but there might be strings attached to get the higher interest rates. Also, some due diligence is needed for choosing the right bank and the investment.”

It is also critical to make sure the bank that the savings are deposited into is part of the Deposit Insurance Scheme, he added.

Under this scheme, the Singapore Deposit Insurance Corporation will pay out up to S$75,000 to each depositor for each institution if a member bank or finance company goes under.

All full banks and finance companies in Singapore are part of the scheme.

Mr Gee also cautioned depositors to bear in mind the administrative and non-monetary costs that come with switching banks. 

“During the period in-between switching banks, which often ranges from three days to a week, depositors will not be earning any interest. The interest rate offered at the new bank should therefore more than offset this loss,” he said.

“The time and effort involved in switching banks such as opening accounts and transferring the funds are non-monetary in nature but should also not be ignored.” ADDITIONAL REPORTING BY TAUFIQ ZALIZAN