Possible US rate hike could impact Singapore benchmark interest rates

Most analysts are forecasting the FOMC meeting this week will conclude in a rate hike. Market watchers discuss the impact of this on Singapore.

SINGAPORE: After keeping interest rates near zero for seven years, there are expectations that the US Federal Reserve is ready to announce a rate hike at its Federal Open Market Committee (FOMC) meeting this week, following a two-day policy meeting.

Most analysts are forecasting an increase in the federal funds rate from a target range of "0 to 0.25 per cent" to a range of "0.25 to 0.5 per cent". A decision is due early Thursday morning Singapore local time.

At its last policy meeting in October, the US central bank opted to keep rates steady, fuelling talk that it will finally make the move to raise interest rates at this week's meeting. But a rate hike has long been anticipated and across the rest of the world, this has been gradually priced in.

In Singapore, benchmark rates have been rising. Data from the Association of Banks in Singapore shows that the three-month Singapore Swap Offer Rate (SOR) has increased from around 0.8 per cent at the start of the year to over 1.2 per cent last month. Meanwhile, the three-month Singapore Interbank Offered Rate (SIBOR) rose from just over 0.4 per cent to close to 1.1 per cent.

"It's clear that most forecasters think that SIBOR is on its way up and the question is really, (by) how much by the end of next year?" said chief economist for Emerging Asia at Barclays, Leong Wai Ho. "So it ranges from a 1.5 to 2 per cent sort of SIBOR target, which I think is reasonable to assume, because in all likelihood, the Fed is likely to put in two rate hikes next year. So that's a cumulative additional 50 basis points that could be passed down to our interbank markets."

With global interest rates kept artificially low for so long, there have been concerns that some borrowers may be caught off-guard when interest rates rise. To guard against this, Singapore's central bank implemented measures including the Total Debt Servicing Ratio in 2013, to prevent borrowers from taking on excessive debt.

Mr Vishnu Varathan, senior economist at Mizuho Bank, said: "One of the biggest impacts would of course come through for mortgages, primarily because the quantums involved are relatively large compared to the household income.

"That's going to have quite a bit of an impact on certain households, particularly those who entered into the property market at high prices and have over-leveraged. But some of these have already been mitigated by a lot of the macroprudential rules that the MAS put in."

While higher domestic interest rates mean bad news for borrowers, it benefits savers, who can stand to gain higher returns on their deposits. In addition, because Singapore uses an exchange rate policy to manage its economy, exports could stand to gain a boost.

The boost is expected to come from a weaker Singapore dollar, which will make Singapore exports more competitive. So far this year, expectations of higher US interest rates have driven the Singapore dollar 6 per cent lower against the US dollar.

Source: ChannelNews Asia 14th December 2015

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Possible US rate hike could impact Singapore benchmark interest rates

Most analysts are forecasting the FOMC meeting this week will conclude in a rate hike. Market watchers discuss the impact of this on Singapore.

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