Low interest rate

Interest rate has been low for the past few years. It will continue to be low for a long time, partly due to supply and demand. There is low demand for loans due to the global economic downturn. There is too much money due to stimulus spending of governments.

But there is another factor. The banks are keeping large spread for themselves. They charge a high interest rate on their loans, especially to small businesses, but offers a low interest rate to their savings. They make a large profit.

In a competitive market, the banks should be competing among themselves to pay higher interest rate to get savings to give out as loans. Their access to cheap government money reduces the need for paying competitive interest rate. There are just a few banks and there could be some "tacit understanding" among the banks that they do not need to compete for savings in this environment. This is an oligopolistic situation.

For interest rate to raise, we need a new arrangement for businesses to get loans at cheaper rates, and for savers to get a higher interest rate. This is a challenge for the governments and economists to rebuild a more competitive environment for the financial sector. The old "free market" did not work well.

Tan Kin Lian