Local interest rates fall to 12-month low amid Singapore dollar strength

LOCAL interest rates are falling as the strong Singapore dollar (SGD) is attracting inflows.

The key three-month Sibor or Singapore interbank offered rate used to price home loans is at a 12-month low of 0.87192 per cent on Tuesday, a level it reached on Aug 19. The three-month Sibor is now some 30 per cent lower than the year high of 1.254 per cent on Jan 19.

The three-month SOR or swap offer rate - a benchmark for commercial loans - has fallen even more; at 0.75448 per cent on Monday, the rate has plunged almost 60 per cent from its January high of 1.76235 per cent.

The low interest rates are due to continued strength of the SGD which attracts inflows, though why the local unit is strong has drawn mixed views given that growth here is weakening while some officials of the US Federal Reserve have recently made hawkish statements.

The SGD has appreciated about 5 per cent against the US dollar (USD) since January.

Improved domestic liquidity conditions and risk appetite holding up are the likely reasons behind why the Sibor and the SOR are low despite some signs of USD strength re-asserting, said Eugene Leow, DBS Bank economist.

"A lot of this optimism and inflows hinges on the market assuming that the Fed would not be able to hike rates," said Mr Leow.

"A strong Singapore dollar is something of a big mystery, the economic fundamentals are not that fantastic in Singapore," said Roy Teo, ABN Amro Bank senior forex strategist.

The government earlier this month revised growth estimates downwards to 1-2 per cent this year, from the previous forecast of 1-3 per cent.

Last week, latest trade data showed that non-oil domestic exports (NODX) got off to a bad start in the second half of the year, with the key NODX sinking 10.6 per cent year on year in July and extending the 2.4 per cent dip in June.

The drop exceeded the 2.5 per cent fall the market was expecting.

Analysts are divided over whether the Monetary Authority of Singapore will keep the zero appreciation policy in the upcoming October policy meeting unchanged or ease to help out exporters.

In the meantime, the SGD has become a mini safe haven because of weak sentiments on the USD as the market is sceptical of a Fed hike, said Mr Teo.

US Federal Reserve vice-chairman Stanley Fischer made some hawkish remarks on Sunday, but some think chair Janet Yellen is still dovish when considering a 2016 rate hike.

Mr Teo noted that the market sold USD on Tuesday following a slightly higher move on Monday after Mr Fischer's comments.

The SGD strengthened to S$1.3496 on Tuesday 5.20pm from S$1.3523 on Monday. Last Friday it was S$1.3460.

"The Fed is creating range bound trading," said Mr Teo.