Sibor and SOR head north on China worries

Singapore

SINGAPORE's key interest rates continue to rise to levels last seen in 2008, amid persistent worries about China.

The benchmark three-month Singapore interbank offered rate (Sibor), typically used to price home loans, rose for the fourth consecutive day to 1.25200 per cent on Wednesday; it was 1.19125 per cent last Thursday and 1.18513 per cent on Dec 31.

The three-month swap offer rate (SOR), used mainly to price commercial loans, rose to 1.75581 per cent on Tuesday, up 0.03083. It was 1.70064 per cent on Dec 31.

Worries about how closely Singapore's economy is intertwined with China's is weighing on the Singdollar (SGD) and putting pressure on the Sibor and SOR.

Another possible hike in US interest rates in March - when the next meeting of the US Federal Open Market Committee (FOMC) is to be held - is being factored in.

The movements in Sibor and SOR can be partly attributed to volatility in the forex markets, which came on the back of gyrations in the offshore yuan (CNH), said Eugene Leow, DBS Bank economist.

"Cyclically, SGD rates still have to contend with the Fed hike cycle," he added.

Markets are expecting the hikes in 2016 to be timed, most likely, with the March or April FOMC meetings, to be followed by either the September or November FOMC meetings, said Saktiandi Supaat, Maybank head of foreign exchange. "We expect two to three hikes, totalling 50 to 75 basis points in 2016," he said.

The SGD, which has lost 1.8 per cent since the beginning of the year, is expected to continue to weaken. Interest rates will rise to compensate for holding onto the falling currency. It stood at 1.4349 against one US dollar at 4.05 pm.

Commenting on the SOR, Victor Yong, United Overseas Bank rate strategist, said: "Persistent negative bias on the SGD currency remains, and episodes like China risk at the start of the year will exacerbate the underlying conditions and lead to SOR spikes."

The yuan has lost 1.5 per cent in the year to date; the Shanghai Composite Index has tumbled 16 per cent over the same period. Other Asian currencies have been dragged lower amid the yuan depreciation, but the Singdollar is among the most hard hit.

China is Singapore's largest trading partner and the city-state's second-largest source market for inbound tourists. Singapore, in turn, became China's largest overseas direct investment destination in Asean in 2014, and has been China's largest foreign investor since 2013.

The transmission effects appear to be stemming from the forex channel - a slightly firmer broad dollar and lingering suspicion over how much latitude the People's Bank of China will impart to the RMB against the trade-weighted RMB index, said Selena Ling, OCBC Bank economist.

"The Singapore economy is seen as more leveraged to the China slowdown story. The ongoing crude oil slump is also interpreted as potentially giving Asian central banks more leeway on the monetary-policy front amid a lacklustre economic backdrop."

Singapore's central bank, the Monetary Authority of Singapore, had surprised the market in January last year with a off-schedule easing before its April review.

OCBC's current forecast is for the USD-SGD to head towards 1.4670 before the year is out, and for the three-month Sibor and SOR to similarly test the 2 per cent handle.

"This is also predicated on the monetary policy status quo (which assumes that crude oil prices do not continue to slide towards the US$20 handle) and some stabilisation in market sentiments towards the RMB trade weighted index."

Oil has dropped below US$30 a barrel in New York for the first time in 12 years, said a Bloomberg report.