The city-state's 10-year bond yields have slipped in the past months to 2.2 percent, half the inflation rate, which Prime Minister Lee Hsien Loong said may average above 5 percent in 2008. Bond yields usually climb when inflation is rising to compensate domestic investors for higher consumer prices, but economists warn they should not count on that this time.

They say the 10-year yield could fall to a low of 2 percent and will probably stay below 3 percent this year.

"The negative interest rate for Singapore is likely to support continued interest in residential property," UBS analyst Regina Lim said in a report on Friday.

UBS expects rents to rise 5-20 percent this year while property prices will remain firm.

Economists say expectations that monetary authorities will steer the Singapore dollar higher to quell inflation have boosted foreign capital inflows into the city-state, adding to the buying pressure on the Singapore dollar.

This in turn has prompted the monetary authorities to buy US dollars to prevent too rapid gains of the local currency and release more funds into the banking system, depressing market lending rates at a time when inflation is at record highs.

Leong Sze Hian, president of the Society of Financial Services Professionals in Singapore, recommended investors buy stocks or overseas bonds lest "your money keeps getting smaller and smaller because of inflation".

Annual inflation rose to a 25-year high of 4.4 percent in December from around 0.5 percent at the start of 2007 while lending rates tumbled.

The 10-year bond yield has fallen to 2003 levels and the three-month Singapore Interbank Offered Rate (SIBOR) -- a benchmark for mortgage loans -- hit a three-year low of about 1.7 percent.

Analysts say the Monetary Authority of Singapore, the city-state's central bank, is unable to steer market lending rates and liquidity because it conducts its monetary policy through the exchange rate rather than by setting interest rates.

Singapore banks, flush with cash, pay just 0.25 percent on savings deposits and 0.82 percent on one-year fixed deposits, according to MAS data.

"You have got this combination of strong external inflation impulses from food, and to some extent oil. You have also got this environment of low interest rates which the Fed is creating," said Giles Keating, the head of research for private banking and asset management at Credit Suisse.

"It is a classic monetary policy dilemma," he said, adding that his bank expects Singapore's property market to remain "very buoyant".

Economists said the lower SIBOR rates will feed into cheaper mortgage rates that will in turn boost investor's appetite for real estate.

"When interest rates get so low...people start to go long properties again by funding cheaply from the markets," said Joseph Tan, an economist at Fortis Bank.

Prices in Singapore's red-hot property market have climbed since mid-2006 to their highest level in more than 10 years, but are still below peaks seen before the Asian financial crisis.

Additional reporting by Saeed Azhar

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