I am not a fan of fixed deposits and have never been one, even if they are now offering sky-high interest rates. Nevertheless, I understand that there’s a place for them in some investors’ portfolios. If not, why would there be hour-long queues to place fixed deposits at some of the local banks? Even then, are the trio of local banks offering the best fixed deposit rates in town? In this article, I decide to review how UOB, DBS and OCBC fixed deposits compare to other banks in Singapore.
What Are Fixed Deposits?
A fixed deposit account is a financial instrument provided by banks which provides investors a HIGHER rate of interest than a regular savings account until a given maturity date. It is also commonly known as a time deposit. Since these are monies deposited with financial institutions, they are also insured up to $75,000 by the Singapore Deposit Insurance Corporation Limited (SDIC).
It can provide a higher interest rate because the depositor would have to lock up the money for a fixed amount of time. The tenure can range from as short as 1 month to as long as a couple of years. In addition, the amount to be deposited is also decided upfront. Since the amount and time period are known upfront, banks are able to offer a guaranteed (and usually higher) interest rate to compensate for the loss of liquidity. Should the depositor wish to withdraw the money before the contracted time is up, he or she will receive lesser or even no interest.
Now that you have understood how fixed deposit account works, let us compare the interest rates offered by the various banks in Singapore.
Compare UOB, DBS and OCBC Fixed Deposit Interest Rates
To make a comparison that will benefit most ordinary folks in Singapore, I will make the following basic assumptions:
- Deposit amount is above S$10,000 but below S$100,000
- Fresh funds into the bank and not uplifting/renewal
- No special banking relationship/privileges with the bank etc.
- Placement is done at the branch and not online
- Tenure is 12-month unless otherwise stated
- Ongoing fixed deposit promotion taken into account
- UOB, DBS, OCBC, HSBC, Standard Chartered, Hong Leong, RHB, CIMB, Maybank, Bank of China and ICBC make up a good mix of local, regional and international banks
As shown in Diagram 1, with the exception of UOB, there are other commercial banks and financial institutions offering higher interest rates for fixed deposits than the local banks. The bar is set at the 3.7% range and I reckon that’s what savers should be targeting under current market conditions.
Savers who go with the trio of local banks probably do so out of convenience and familiarity. After all, UOB, DBS and OCBC have the most banking branches in the neighbourhood and are reputable names in the market.
Should I Rush To Deposit My Monies Into Fixed Deposit Now?
The interest rates shown in Diagram 1 are probably at all-time highs for the past decade and you are probably salivating at them right now. This is reflective of the high-interest rate environment that we are in today. These are obviously very juicy yields considering that these are almost “guaranteed” returns. Even if a fixed deposit suits your investment profile, I may not be rushing down to the bank immediately just yet. Here’s the reason why.
The most recent dot plot in September, which shows where the Fed’s policymakers expect the federal funds rates to be in the future, peaks at 4.75% in 2023 as shown in Diagram 2.
However, this was before Fed delivered yet another 75-basis point hike in its most recent meeting in November. As a result, a terminal rate of 5% by 1H 2023 is now gaining strength.
With this figure in mind, we can expect fixed deposit rates to continue to increase in the coming months unless Fed performs an unexpected early pivot. Since there is usually no strict allocation limit like the Singapore Savings Bonds, it may not be necessary to rush down to open a fixed deposit account just yet. In other words, if you must invest in fixed deposits, it may pay to monitor and wait a couple of months more.
Foreign Currency Fixed Deposits
Since we are on the topic of fixed deposits, I might as well make it comprehensive by covering foreign currency fixed deposits as well. They work exactly the same as Singapore-dollar denominated fixed deposit rates. However, account holders need to be mindful of exchange rate risk, especially if their living expenses are paid in SGD.
As Singaporeans, we are all cheering the strength of the Singapore dollar when we make our holiday travels. While it may seem enticing to convert Singapore into other foreign currencies deposit, do note that the continued strength of the Sing dollar may play against you. For instance, if the Singapore dollar continues to strengthen during the tenure, one may end up with LESSER Singapore dollars even after collecting the interest at the end of the foreign currency fixed deposit. Investors need to take into consideration how volatile exchange rate can be before committing to a foreign currency fixed deposit account.
Conclusion of Fixed Deposits
Fixed deposit would always have a place in some investors’ portfolios. It would suit those who have very low risk appetite. Those who are not as investment savvy would also appreciate the simplicity of a fixed deposit. I hope this article sheds light on how the FD interest rates of the local banks stack up against other banks in Singapore. Even if they are attractive, it may pay to wait a couple more months before committing to a fixed deposit under the current macro environment.
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