Interest rates up as S'pore dollar falls
LOCAL interest rates have been on a slow upwards creep, and on the first working day of the New Year, rose to a 52-week high as the Singapore dollar continues to weaken against the greenback.
The key three-month Sibor - or Singapore interbank offered rate, on which most home loans are pegged - rose to 0.45738 per cent on Friday, up 17.6 per cent from the low of 0.38885 per cent on Feb 21.
The benchmark rate had been flatlining for much of the first half of last year until it began its slow rise from August, then rose steadily as the United States dollar rallied.
The Singapore dollar has fallen to four-year lows against the US dollar. At Friday's rate of 1.328, it is down more than 7 per cent from July 23 high of 1.238.
Observers say Singapore interest rates are now tied to the strength of the US dollar and will move further up even in the absence of rate hikes from the US Federal Reserve. The Fed is expected to raise rates in the second half of this year.
"I suspect a large part of the Sibor's upward creep is due to the SGD weakness," said Selena Ling, OCBC Bank economist.
The latest growth data released last week showed that the Singapore economy continues to slow and, with not much cost pressures, the Singdollar is likely to remain weak.
The Singapore economy grew a weaker-than-expected 1.5 per cent year on year in the fourth quarter of last year, slowing from the third quarter's 2.8 per cent expansion as the manufacturing sector shrank in the final quarter, said the Ministry of Trade and Industry on Friday.
Full-year 2014 growth was 2.8 per cent, down from 2013's 4.1 per cent.
There is also "the softer gross domestic product growth coupled with benign inflationary environment which does not warrant an overly aggressive monetary policy stance", Ms Ling added.
She said another factor for tighter Singdollar liquidity has been "intensifying competition for SGD deposits, especially over the year end".
OCBC's forecast for three-month Sibor is 0.55 per cent and 0.69 per cent for the middle and end of this year, respectively.
DBS Bank projects that the Singdollar will head to 1.33 by the fourth quarter of this year and the three-month Sibor to reach 0.60 per cent then.
United Overseas Bank is more bearish - it expects that the start of the US interest rate normalisation in June this year will see further downward pressures on the Singdollar this year.
UOB's forecast for the exchange rate remains at 1.34 as of the end of the second quarter of this year, said the bank, in its first quarter of the year outlook.
"With the SGD Sibor positively correlated with the USD Libor (London interbank offered rate), our expectations are that the US interest rate normalisation in June 2015 will see the Sibor moving on a higher trajectory in 2015.
"We expect the three- month SGD Sibor to move towards 1 per cent by end-2015," said UOB.
Should home loan borrowers worry? Some say the pace of the increase could be a concern but as long as the absolute interest rate remains low, the hike in monthly instalments should be manageable.
On a $100,0000 loan with a 20-year tenure, the monthly instalment would rise $11.45 to $484.85 if the three-month Sibor moves to 0.7 per cent for a home loan package based on three-month Sibor + 0.85 per cent, according to OCBC Bank.
Lui Su Kian, head of DBS Bank (Singapore) deposits and secured lending, said the best time to lock in an attractive set of fixed rates is during a low interest environment.
"Fixed rate packages continue to remain popular with both private property and Housing Board home owners, but there are also options to have both floating and fixed rates within the same programme," said Ms Lui.
THE BUSINESS TIMES