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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 Jan 2, 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 2014 until it began its slow rise from August, then picked-up pace steadily as the USD rallied. The SGD has fallen to four-year lows against the USD. At last Friday's 1.328, it is down more than 7.0 per cent from last year's July 23 high of 1.238.
Observers say Singapore interest rates are now tied to the strength of the USD and will move further up even in the absence of rate hikes from the US Federal Reserve. Expectations are for the US Fed to raise rates in the second part 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 SGD 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 2014, slowing from Q3's 2.8 per cent expansion as the manufacturing sector shrank in the final quarter, said the Ministry of Trade and Industry last Friday.
Full year 2014 growth was 2.8 per cent, down from 2013's 4.1 per cent
There's also "the softer GDP growth coupled with benign inflationary environment which does not warrant an overly aggressive monetary policy stance", Ms Ling added.
Ms Ling said another factor for tighter SGD 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 mid- and end-2015, respectively.
DBS Bank projects that the SGD will head to 1.33 by fourth quarter 2015 and 3-month Sibor to reach 0.60 per cent then.
United Overseas Bank (UOB) is more bearish, it expects that the start of the US interest rate normalisation in June 2015 will see further downward pressures on the SGD this year.
Our forecast for the USD/SGD remains at 1.34/USD as of end 2Q 2015, said UOB in its Q12015 outlook.
"With the SGD Sibor positively correlated with the USD Libor (London interbank offered rate), our expectations 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 1.00 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 S$100,0000 loan with 20-year tenure, the monthly instalment would rise S$11.45 to S$484.85 if 3-month Sibor moves to 0.70 per cent for a home loan package based on 3-month Sibor + 0.85 per cent, according to OCBC Bank.
Lui Su Kian, DBS Bank (Singapore) head, deposits and secured lending, consumer banking 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 HDB home owners, but there are also options to have both floating and fixed rates within the same programme," said Ms Lui.
An earlier version of this article stated that UOB expects that "the start of the US interest rate normalisation in June next year will see further downward pressures on the SGD". UOB has clarified that it should be June this year (2015). The article above has been amended to reflect this.