Singapore interest rates spike on liquidity crunch, are likely to go higher

SINGAPORE's short-term key interest rates spiked on Wednesday due to a liquidity crunch on seasonal factors and ahead of an expected hike in US interest rates next month.

Interest rate strategists also say the normally sticky short-term interest rates - the one-month and three-month Sibor - are playing catch-up.

"Liquidity might have tightened on the margin. Moreover, the market may be pre-empting the December Fed hike," said Eugene Leow, DBS Bank rates strategist.

The US Federal Reserve is widely expected to hike interest rates in mid-December, which would make it the third raise this year.

The benchmark three-month Sibor or Singapore interbank offered rate rose six points to 1.183 per cent, the highest it has reached since March 2016. The three-month Sibor is typically used to price home loans.

The one-month Sibor also shot up about six points to 1.067 per cent while the overnight rate rocketed to an intraday high of 1.2 per cent when it averaged between 0.25-0.30 per cent last week, all pointing to a liquidity crunch which has been building up, according to Victor Yong, United Overseas Bank interest rate strategist.

"Liquidity in the SGD funding market has come under pressure, liquidity premium is high now that they want to conserve cash - it pays not to be caught short," said Mr Yong.

On the one-month Sibor's spike, Mr Yong noted that it would cross over to the New Year, which is also the "sensitive period" when companies and banks close their accounts for the year and would like their books to "look amply funded". He added: "You don't want to lend in these sensitive periods."

Mr Yong pointed to another factor which triggered the Sibor hikes.

The Monetary Authority of Singapore weekly bill auctions which took place on Tuesday, also saw sharp jumps in the four-week and 12-week bills. The rates for the four-week bill shot up to 1.54 per cent from 1.2 per cent while the 12-week bill rose to 1.50 per cent from 1.31 per cent.

MAS bills are among instruments used by the central bank to manage liquidity in the banking system.

Mr Yong said that the short-term Sibor rates need to reprice higher to be nearer the rates of the MAS bills. So he is looking at another five-point adjustment for the short-term Sibor rates soon.

He estimates the three-month Sibor to hit 1.40 per cent by end-2017, adding: "It looks a bit stretched and signals the year-end factor could get worse plus the Fed hike."

Said Selena Ling, OCBC Bank economist: "There probably is a combination of both global and domestic factors. First, there is some USD tightness (seasonal factor) going into the year-end, maybe a little earlier than usual, as well as market anticipation of the next US Fed rate hike in mid-December and the ongoing tapering of the Fed's balance sheet."

Ms Ling added that interest rates have also spiked sharply in other markets like the Hibor which is the Hong Kong interbank offered rate.