By Boo Kok Chuon

On 16 July 2026, Standard Chartered Singapore publicly advertised its CashOne Personal Loan at interest rates from 0.90% per annum, translating to an effective interest rate (EIR) from 1.75% per annum, depending on the borrower’s credit profile and loan tenure.

Barely three weeks earlier, on 23 June 2026, the Department of Statistics Singapore released its Consumer Price Index, May 2026 press release. The report recorded headline inflation at 1.8% year-on-year, while Consumer Price Index excluding accommodation rose 2.3% over the same period.

At first glance, the arithmetic appears irresistible.

If I can borrow money at an effective interest rate of 1.75%, while the purchasing power of money is declining by 1.8% to 2.3% every year, have I finally discovered free money?

More importantly, if borrowers appear to benefit from such an arrangement, why would any rational bank willingly lend at these rates?

These questions are neither new nor uniquely Singaporean.

More than a century ago, the American economist Irving Fisher provided the analytical framework for answering precisely this question. Nearly seventy years later, another pair of economists, Eugene F. Fama and G. William Schwert, examined how real estate behaves during inflationary periods.

Together, their work offers a surprisingly elegant explanation for one of today’s most intriguing financial paradoxes.

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The Fisher Equation: Looking Beyond the Interest Rate

When most people compare loan packages, they instinctively focus on the advertised interest rate. That is understandable.

After all, if Bank A charges 1.75% while Bank B charges 3%, common sense tells us that Bank A offers the cheaper loan.

Economics, however, asks a different question.

It asks not merely how much interest is paid, but what that interest is worth after accounting for inflation.

This distinction was famously articulated by Irving Fisher in what is now known as the Fisher Equation.

In its simplest approximation,

Real Interest Rate ≈ Nominal Interest Rate − Expected Inflation

Although the equation appears mathematical, its underlying intuition is remarkably simple.

Suppose you lend your friend S$100 today.

A year later, he repays you S$101.75.

Nominally, you have earned S$1.75.

But suppose that during the same year, inflation causes the prices of goods and services to rise by 2.3%.

The additional S$1.75 no longer purchases what it could have purchased a year earlier.

In real economic terms, your purchasing power has actually declined.

Conversely, your friend is repaying you using dollars that have become less valuable than those originally borrowed.

This is the critical insight behind Fisher’s work.

The true economic cost of borrowing is not determined solely by the interest rate printed in the loan agreement. It is determined by the relationship between interest rates and inflation.

Applying Fisher’s framework to the present example produces an interesting result: if a borrower pays an effective interest rate of 1.75% while inflation runs at approximately 2.3%, the real borrowing cost is approximately negative 0.55%. The borrower is, in effect, repaying the loan with money possessing less purchasing power than when it was originally borrowed.

Naturally, this gives rise to an obvious question.

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Have I Beaten the Bank?

At first glance, the answer appears to be yes.

If inflation exceeds the interest charged on my loan, surely I have profited at the bank’s expense.

Not quite.

The flaw lies in assuming that borrowing money, by itself, creates wealth. In reality, it does not.

Imagine borrowing S$100,000 at an effective interest rate of 1.75% and depositing the entire sum into a drawer at home.

A year later, inflation has indeed reduced the real burden of your debt. Unfortunately, inflation has also reduced the purchasing power of the S$100,000 sitting idly in the drawer. Your debt became lighter, but your cash also became weaker.

Economically, very little has changed. The same reasoning applies if the money remains idle in a current account paying negligible interest.

The Fisher Equation does not tell us that borrowers become richer simply because interest rates fall below inflation. What it tells us is that capital has become unusually inexpensive in real economic terms. Whether inexpensive capital becomes profitable depends entirely on what the borrower chooses to do with it.

This distinction lies at the heart of modern finance: borrowing to fund consumption rarely generates wealth, but borrowing to acquire productive assets may.

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When Cheap Debt Meets the Right Asset

If negative real borrowing costs merely make capital inexpensive, what assets are most capable of preserving or enhancing purchasing power?

This question occupied economists long before today’s low-interest-rate environment.

In their landmark 1977 paper, Asset Returns and Inflation, Eugene F. Fama and G. William Schwert examined how different classes of assets behaved during periods of inflation. Their findings have since become one of the cornerstones of modern real estate economics. Among the various asset classes studied, residential real estate exhibited characteristics of an effective hedge against expected inflation.

The conclusion is neither mystical nor speculative. It follows from several straightforward economic principles: land is inherently scarce.

Unlike money, governments cannot simply create additional land through monetary expansion. Construction costs also tend to increase over time. Labour becomes more expensive. Building materials become more costly. Replacement costs therefore rise alongside inflation. Rental income may likewise adjust over time, particularly where leases permit periodic revisions.

These factors together help explain why well-located real estate has historically demonstrated an ability to preserve purchasing power over long investment horizons.

This, however, does not mean property prices always increase.

Property markets remain cyclical, and if fundamentals are weak, economic recessions continue to occur.

Vacancies will rise and investors overpay. Poorly located developments may also underperform for years.

Fama and Schwert did not suggest that real estate is immune from market forces.

Rather, their research demonstrated that over the long term, residential real estate has exhibited characteristics consistent with an inflation hedge, particularly against expected inflation.

It is precisely why institutional investors, pension funds and family offices continue to allocate substantial portions of their portfolios to real assets.

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Viewing the Investment Through a Balance Sheet

Viewed together, Fisher and Fama tell a remarkably coherent story.

Fisher explains the liability.

When inflation exceeds the borrowing cost, the real economic burden of fixed-rate debt gradually declines.

Fama explains the asset.

Real estate possesses characteristics that have historically enabled it to preserve purchasing power during inflationary periods. The interaction between these two principles is where the economics becomes particularly interesting.

Suppose an investor acquires a well-selected property using debt carrying a negative real interest rate, on one side of the balance sheet sits a liability whose real burden is gradually shrinking; on the other side sits an asset that has historically demonstrated characteristics of an inflation hedge.

Ceteris paribus, the combination helps explain why periods of low real interest rates often coincide with increased investment activity in real assets.

The borrowed money is no longer lying idle. It has been deployed into an asset capable of generating rental income while potentially preserving purchasing power over time.

The real lesson, therefore, is not that one should borrow merely because interest rates are low. Rather, it is that negative real borrowing costs reduce the economic cost of acquiring productive assets.

Whether that opportunity ultimately creates wealth depends entirely on the quality of the investment.

This naturally leads to the second question: if borrowers may benefit from negative real interest rates, does this mean banks are somehow losing money by offering such loans?

Does This Mean Banks Are Losing Money?

The short answer is, again, not quite.

If borrowers are paying an effective interest rate of approximately 1.75% while inflation exceeds that figure, it is tempting to conclude that banks have somehow priced their loans irrationally or are willingly accepting losses.

That conclusion misunderstands both the role of commercial banks and the mechanics of modern banking.

Commercial banks do not exist merely to lend money.

Their primary economic function is financial intermediation.

In simple terms, banks act as intermediaries between those with surplus capital and those requiring capital. They accept deposits from millions of individuals and businesses, pool those funds together, assess the creditworthiness of borrowers, allocate capital efficiently and manage the associated risks.

Money, therefore, is not the bank’s product, it is both the raw material and its product.

The bank’s true business lies in assessing risk, allocating capital efficiently and managing its balance sheet.

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Banks Do Not Operate in Isolation

It is equally important to appreciate that commercial banks do not possess unlimited freedom to decide what interest rates they charge.

Their lending rates are heavily influenced by the prevailing monetary environment.

Historically, central banks have influenced borrowing costs by adjusting policy interest rates to achieve macroeconomic objectives such as controlling inflation, stabilising economic growth and maintaining financial stability. Lower policy rates generally reduce the banking system’s cost of funding, while higher policy rates increase it.

Singapore adopts a different monetary framework.

Unlike many central banks, the Monetary Authority of Singapore conducts monetary policy primarily through the management of the Singapore dollar exchange rate rather than an explicit domestic policy interest rate.

Nevertheless, Singapore’s domestic interest rates remain closely connected to global funding conditions through international capital markets. As funding costs fall internationally, competitive pressures generally compel commercial banks to reduce lending rates. Conversely, when global funding costs rise, lending rates tend to increase across the banking sector.

Individual banks may compete on pricing. They do not determine the overall direction of interest rates. In other words, banks largely swim with the monetary tide rather than create it.

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A Note on Deposit Rates

An astute reader may immediately raise an apparent inconsistency.

If banks can lend personal loans at an effective interest rate of approximately 1.75%, why do some savings accounts advertise interest rates considerably higher?

For example, some Singapore savings accounts advertise bonus interest rates exceeding 3% per annum.

This article deliberately does not examine those promotional rates.

According to MoneySmart Singapore’s comparison of savings accounts, the base interest rate on the UOB One Account is 0.05% per annum, while the significantly higher advertised rates are available only if customers satisfy multiple qualifying conditions, including salary crediting, eligible credit card expenditure and GIRO bill payments.

Those qualifying activities may themselves generate additional revenue or strategic value for the bank. Whether promotional interest rates represent the bank’s true economic cost of funding therefore raises a different and equally fascinating question, but one that deserves an article of its own.

For present purposes, the focus remains on the economics of borrowing when real interest rates become negative.

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Where Does the Money Actually Go?

Perhaps the easiest way to understand financial intermediation is through a simple example.

Suppose you borrow S$1 million from Bank A to purchase a property.

Coincidentally, the seller also happens to maintain his banking account with Bank A.

Many people instinctively imagine that S$1 million physically leaves the bank.

In reality, that is not what happens.

Upon completion of the transaction, the bank records a loan asset of S$1 million against you.

At the same time, it records a deposit liability of S$1 million in favour of the seller.

From the bank’s perspective, the transaction is largely an internal reallocation of its balance sheet:

One customer now owes the bank S$1 million;

Another customer now owns a S$1 million bank deposit.

No truck transports bundles of cash.

No vault is emptied.

No physical money changes hands.

The money simply stayed where it is, just administratively switched accounts.

What exactly happened was, the bank has simply performed its role as a financial intermediary by transferring purchasing power from one economic participant to another.

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Why Low Interest Rates Do Not Mean Low Profits

Understanding this balance sheet perspective explains why seemingly low lending rates do not necessarily imply unprofitable banking.

A commercial bank evaluates its business not by examining a single loan in isolation, but by managing an entire portfolio of assets and liabilities.

Some borrowers will default, others will repay faithfully over decades.

Some depositors will withdraw funds tomorrow, others will leave their savings untouched for years.

The bank continuously manages liquidity, maturity mismatches, regulatory capital requirements and credit risk across millions of transactions simultaneously.

Profitability therefore depends upon the performance of the portfolio as a whole rather than the nominal interest rate charged on any individual customer.

This explains why a bank may rationally extend a personal loan at an interest rate that appears surprisingly low without undermining its commercial viability.

The question is never simply:

“How much interest is this borrower paying?”

The more important questions are:

“What is the bank’s overall cost of funding?”

“What is the probability of default?”

“How does this loan fit within the bank’s broader balance sheet?”

Those are fundamentally different questions.

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The Bigger Picture

We can now return to the question posed at the beginning of this article.

Have we finally discovered free money?

The answer remains no.

The Fisher Equation teaches us that when inflation exceeds borrowing costs, the real cost of debt becomes negative.

Fama and Schwert remind us that real estate has historically exhibited characteristics consistent with an inflation hedge, particularly against expected inflation.

Modern banking theory explains why banks can continue to lend profitably despite seemingly inexpensive borrowing rates.

Taken together, these ideas reveal that the true opportunity lies not in borrowing itself, but in the productive deployment of borrowed capital.

Cheap debt is not wealth.

It is merely inexpensive access to capital.

Whether that capital ultimately creates wealth depends not on the interest rate printed in the loan agreement, but on the judgment of the borrower.

The mathematics of finance may occasionally tilt in one’s favour.

The economics of investment, however, will always depend upon the quality of the decisions that follow.