Did UOB One Account jump the gun in cutting interest rates too early?

By now it should be widely known that UOB is reducing the interest rates of its flagship UOB One Account from 1 May 2024. This announcement was made as early as 1 April to give its customers a one month’s heads-up. While the notice period was nice, a lot had changed on the macro-economic front during this period. Specifically, inflation continued to stay hot which caused Fed to postpone its decision to unwind its interest rate hike. With Fed’s delay, did UOB jump the gun by cutting UOB One Account interest rates too early?

UOB One Account Interest Rate From 1 May 2024

Of the 3 local banks, UOB One Account stood out for the relative ease to unlock 5% effective interest rate on $100,000 of deposits. This yields $5,000 per annum, enough to fund the travel expenses of a small family for a regional holiday. As such, my family prioritised UOB One Account as our main banking accounts to maximise the interest that can be earned. Unfortunately, this lasted less than 3 years as UOB decided to revise its interest rates as shown in Diagram 1.

The effective interest rate will fall from 5% to 4%, although the amount of deposits that can earn this interest rate has increased from $100,000 to $150,000. The larger AUM is welcome, and when combined with the current UOB Big Savings Payout Promotion, helps to somewhat mitigate the fall in interest rates. For instance, $250 cash credit on $50,000 new funds for 4 months represents an effective yield of 1.5% p.a. which is slightly higher than the 1% that they reduced. Another positive is that other mechanisms of the UOB One Account were left unscathed.

In Jan 2022, I wrote an article on the tips to get the best interest rates from banks’ high-yield savings accounts. With this change, UOB One immediately plummeted to last choice in my ranking after I have reviewed the local banks’ flagship accounts. Please see diagram 2 for an updated ranking.

Moreover, let’s not forget that UOB is the last bank standing that refuses to allow its customers to lock their monies in existing accounts and earn the same interest rates. This is another negative when compared to OCBC and DBS.

UOB’s rationale for cutting interest rates

When the move to cut interest rates on the UOB One Account was announced on 1 April, UOB cited that the “rate revision is to align with longer-term interest rate expectations” (Source: Straits Times)

Well, this rationale does not hold water at this juncture anymore as stubborn US inflation dents hopes for imminent Fed interest rate cut. In fact, market expectations of an 6 interest rate cuts at the start of the year have now dwindled to probably just 2 or 3 cuts for the entire 2024. The Fed dot plot as at March 2024 shows a median of 3 X 25 bps interest rate cuts in 2024, bringing benchmark rate at a target range of 4.5% to 4.75% by end 2024 as shown in Diagram 3.

Since Singapore is a price taker when it comes to interest rates, it will also not experience any fall in interest rates in the immediate term. (refer to The Impossible Trinity in economics) With interest rates not expected to fall as fast as a couple of months ago when the decision was first made by UOB, its customers have every right to feel slightly shortchanged.

Of course, what is bad news for its customers spells good news for its shareholders as UOB has now lowered the cost of its funds which should help to improve its net interest margin.

Conclusion

UOB probably jumped the gun too early in this instance as the other 2 local banks announced that they have no plans to revise the interest rates on their flagship accounts just yet. Consumers in a free market can choose to vote with their feet and choose to move their funds elsewhere although I got a feeling that the relationship here could be quite sticky.

This article is published on 5 May 2024

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