SINGAPORE — With the United States’ Federal Reserve raising interest rates for the first time in seven years, consumers in Singapore may see lending costs increase but those who save may also benefit from higher deposit rates, analysts said.
This is because interest rates here are influenced by changes in the US fund rates as well as market expectations of future movements in the exchange rate. The Singapore Interbank Offered Rate (SIBOR) and Swap Offer Rate (SOR), used to price many housing and consumer loans, have risen in anticipation of the Fed’s decision and strengthening in the greenback.
The three-month SIBOR has risen from around 0.4 per cent at the beginning of the year to around 1.1 per cent currently, while the three-month SOR has inched up from around 0.8 per cent to close to 1.6 per cent during the same period. The rates will likely rise further, which means greater burden on borrowers in financing their loans.
“The likely trajectory is for a modest upwards creep in the SIBOR on the back of a generally strengthening US dollar against most Asian currencies amid a still decelerating China and tepid growth story,” said Ms Selena Ling, OCBC Bank’s head of treasury research and strategy.
“As long as the Fed’s future moves are well-telegraphed and gradual, businesses and consumers will have time to adjust. What financial markets dislike are surprises and being caught unprepared. Companies may face higher refinancing costs, while the man on the street may also face rising mortgage rates,” she added.
However, the extent of the increase in financing costs is not expected to be drastic given that the Fed had indicated a gradual increase in its benchmark rates. UOB economist Francis Tan projects SIBOR and SOR to settle at 1.5 per cent and 1.65 per cent by the end of 2016.
“We didn’t see SIBOR or SOR moving very drastically after the Fed announcement and (Fed chair) Janet Yellen said the increase will be slow, which means there’s no urgent need for consumers to rush into fixed-rate loans,” he said.
Mortgage adviser Sean Lim from FindAHomeLoan.co said that fixed-rate housing loans have become increasingly popular in the lead up to the Fed’s decision to normalise rates from near zero levels. Loans pegged to fixed deposit rates have also gained popularity among Singapore consumers.
“The lowest lending rate, or SIBOR and SOR, loans we see now is about 1.9 per cent compared to fixed deposit rate loans which is at 1.55 per cent – that’s still almost 4 percentage points difference and I would advise those with a decent loan amount to relook their options because that can result in a great deal of savings,” Mr Lim said.
The low interest rates environment in the past seven years saw property buying activity surge and household debt levels increase. That prompted the Government to tighten property cooling measures and implement the Total Debt Servicing Ratio framework to encourage financial prudence.
While consumers may experience higher loan repayments now, analysts said the US central bank’s decision to hike rates could also lead to higher deposit rates here. That is good news to savers and can help consumers relook their spending and saving habits to cope with rising rates, analysts said.
However, they expect lending rates to still lead the rise as they are more closely tied to the external market movements.
Any positive impact on the broader Singapore economy, though, may take time to filter through even as the Fed move is widely seen as a vote of confidence for the recovery in the US – currently the largest economy in the world.
CIMB Private Banking economist Song Seng Wun said what would help to improve demand for made in Singapore goods is have “US consumers open their wallets and spend”.
“While (raising rates) is an endorsement by the central bank that it is more confident about growth going forward, we extrapolate this to mean that consumers in the US will be buying new TVs, changing their washing machines, vacuum cleaners which will help Asian economies, who are still the manufacturers of the world,” Mr Song said.
“The question is when will we see that happen and until we do, the environment still looks choppy on the back of a still-stagnant global trade,” he added.
17 December 2015
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