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Prime rate cut no elixir for Singapore economy

By Jacqueline Wong

SINGAPORE, Feb 18 (Reuters) - Singapore's first prime rate cut in 17 months could deliver a minor boost to car and home purchases, but most experts doubt the surprise 25-basis-point easing will hasten economic recovery.

The cut in DBS Group Holdings' benchmark lending rate to 4.25 percent on Monday also highlights weak lending conditions as Singapore shows scattered signs of economic recovery after its worst downturn since 1964, analysts said.

"The impact may not be large at the moment given uncertainties in growth outlook, but it will make a rebound more powerful when the global outlook firms up later," said Xin Xie, Asian economist with Bank of America.

Bank credit remains soft in Singapore and many consumers are deeply reluctant to spend or plough into the real estate market despite three years of falling property prices.

The cut in prime rates -- at which banks lend to their best customers and a benchmark for consumer loans -- is expected to immediately lead to lower rates for housing and car loans, delivering a slight boost to small businesses and retailers.

"Lower interest rates always have a positive impact on demand for funds, except in rare situations," said Xie.

New housing loan rates are usually fixed for the first few years and then shift to a formula linked to the prime rate.

DBS BLINKS FIRST

DBS, Southeast Asia's largest bank, already has Singapore's lowest prime rate and its cut is expected to trigger a round of cuts by other big Singapore banks.

United Overseas Bank and OCBC Bank (OCBC) -- both with five-percent prime rates -- would likely shave rates soon to protect home-loan market share, analysts said.

"This intensifies price competition in the housing and auto finance markets and should lead to OCBC and UOB following suit," Barclays Capital said in a note to clients.

Singapore enjoys one of the world's highest per-capita savings rates. Workers stash up to 36 percent of their salaries in a compulsory pension scheme and typically channel the money into housing.

But many are clamping down on their wallets, confronted by a structural rise in unemployment as the city-state shifts to high-end electronics and knowledge-based industries such as biotechnology and pharmaceutical production.

This has left many banks flush with deposits at a time when lending is shrinking, causing an erosion in bank margins.

Analysts say DBS, with the largest deposit base among Singapore's big three lenders, would benefit from cutting interest and deposit rates concurrently.

Gains from the cut in interest-rate costs on deposits more than outweigh the lower interest received from prime rates.

"Their deposits are much larger than their loans in Singapore, and not all loans are pegged to prime," said David Lum, banking analyst with Daiwa Institute of Research.

"They must think that interest rates are not going to rise, which means that given the economic situation, it doesn't look that optimistic," he said.

Savings rates, for example, have hit fresh lows of 0.25 percent following the latest cut. The three-month interbank rate is around 0.6875 percent, but Singapore banks mostly fund loans from large deposits.