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THE key three-month Sibor or Singapore interbank offered rate continues to rise; at 0.734 per cent on Tuesday, it's almost double the rate one year ago due to continued US dollar strength. The three-month Sibor was 0.389 per cent on Feb 21 last year.
From last Wednesday, the three-month Sibor on which most mortgages are priced off is up 7 per cent and the forecast is for more US dollar strength and higher interest rates.
"It's a function of US dollar strength," said Alvin Liew, United Overseas Bank senior economist, adding that it is a broad trend shared by most currencies in the region.
UOB expects the US dollar to reach S$1.40 by the third quarter, up from S$1.36 now, and the three-month Sibor to reach one per cent by the end of this year.
The US dollar was at S$1.32 at the beginning of 2015.
Said Selena Ling, OCBC Bank head, treasury research and strategy: "Our six and 12-month forecasts for three-month Sibor are 0.8 per cent and 0.95 per cent respectively.
"There are upside risks mainly due to the SGD weakness, coupled with the firmer direction from US short-term interest rates ahead of a potential lift-off by the US Federal Reserve around middle of the year."
Another benchmark interest rate - the three-month SOR or swap offer rate - which is typically used for commercial loans, also rose to a 52-week high of 0.944 per cent, up more than 5 per cent from last Wednesday.
Mr Liew said part of Sibor's rise is catching up with the more volatile SOR which is a traded interest rate.
While Sibor's upward move is likely to be sustained, there could be a short-term reversal in the direction of SOR, he said.
It depends on how certain external events such as Greece unfold, or whether the expected hike in US interest rates is delayed, he said.
Another factor pushing local interest rates higher is the tight liquidity situation here, said Mr Liew.
Deposit growth has lagged loans demand and the loan to deposit ratio is above 100.
In a note last month, Citi economist Wei Zheng Kit said the weak Singapore dollar and tight liquidity were adding to the pressure on SOR and Sibor.
"With banks' deposits having lagged credit growth for several quarters - partly reflecting a shift away from SGD deposits onshore (especially to CNH deposits) and possibly capital outflows - the pass through to Sibor has been quicker," he said.
Some analysts think the slide of the Singapore dollar may not have much more to go, in terms of weakening further against the US dollar.
"The worst is probably behind the SGD," said Siddharth Mathur, Citi strategist.