Calls for CPF rates to go up, but many considerations involved

Among them are impact on HDB home loan rates and who pays for the higher quantum

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Singapore banks have been going all out to woo depositors by raising promotional rates for fixed deposits FDs) and interest rates for savings accounts such as the DBS Multiplier, OCBC 360 and UOB One.

As savings and deposit rates rise, there are murmurs in some quarters that the interest rate for the Central Provident Fund Ordinary Account CPF OA) should go up too.

Savings in the CPF OA earn the three-month average of major local banks’ interest rates called the calculated OA rate subject to the legislated minimum interest of 2.5 per cent per annum. The OA rate is reviewed quarterly.

Yet with banks’ interest rates jumping, why has the OA rate stayed at its legally lowest rate of 2.5 per cent since July 1999?

To understand this, we have to dig deeper into how the calculated OA rate is computed.

The formula for the calculated OA rate is the sum of 80 per cent of the average of the local banks’ oneyear FD rate and 20 per cent of the average of their savings rate.

This figure is calculated for the preceding three months, and the three-month average is then used to determine the calculated OA rate for the quarter.

But the FD rate used in the OA computation is the low board rate and not the much higher promotional rates that make the headlines.

Board rates are general FD rates; promotional FDs will be automatically renewed at these relatively lower rates upon maturity.

Meanwhile, the savings rate used to compute the OA rate is the base rate, which has remained at 0.05 per cent even as banks are dishing out bonus interest rates for their flagship savings accounts if customers fulfil certain requirements like depositing their salaries in these accounts.

Recently, FD board rates have started to creep up, but the OA calculated rate has stayed stubbornly below 2.5 per cent.