Singdollar tightening impact on interest rates
MAS announced on 13 April 2018 that they will allow for ‘modest and gradual’ appreciation of the Singdollar. They will do so by slightly increasing the slope of the Singdollar nominal effective exchange rate (S$NEER) policy band. Incidentally, this is the first time MAS moved away from a neutral stance held since April 2016.
Following the announcement, the Singdollar weakended against the greenback, at S$1.3129 per US dollar at 10am, from its close on Thursday of S$1.3126, before stabilising. At 11.20am, the Singdollar had strengthened slightly to S$1.3119 per US dollar. This movement within a short window does not imply any drastic reaction from the FX market.
Reasons for Singdollar tightening
According to business news report, this move on the exchange rate policy was not a surprise, coming on the back of a strengthening economy, improved labour statistics, and rising inflation. Monetary Authority of Singapore (MAS) said the decision is “consistent with a modest and gradual appreciation path of the S$NEER policy band that will ensure medium-term price stability”.
Impact on SIBOR
One potential outcome of the Singdollar’s strength is that it will attract a net inflow of foreign funds thus creating more liquidity in the banking sector. This should keep our interest rates in check. However, we observed costs of borrowing has gone up, since the second half of 2017. Mortgage rates were around 1.4% and 1.65% in April 2018. 1M SIBOR is still around 1.37% since the announcement. We think the market has anticipated this decision and priced into SIBOR prior to the announcement.
After all is said, we hold the view SIBOR rates movement is impacted by many factors including Singdollar exchange rate.
On a side note, we do not think there is any significance this announcement is made on Friday the 13th, which is usually a superstitious unlucky day. Who will be the unlucky one? We certainly hope mortgage borrowers are not those.