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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 rates, the one-month and three-month Sibor, are playing catch up.
Eugene Leow, DBS Bank rates strategist, said: "Liquidity might have tightened on the margin. Moreover, the market may be pre-empting the December Fed hike."
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 (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, after having averaged at between 0.25-0.30 per cent last week. This all points to a liquidity crunch which has been building up, said 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," he said.
On the one-month Sibor's spike, Mr Yong said 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".
"You don't want to lend in these sensitive periods," he said.
Mr Yong pointed to another factor which triggered the Sibor hikes.
The Monetary Authority of Singapore (MAS) 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; 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 the short term Sibor rates need to reprice higher to be nearer the rates of the MAS bills. 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.
"It looks a bit stretched, signals the year-end factor could get worse plus the Fed hike," he said.
Selena Ling, OCBC Bank economist, said: "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."
She said interest rates have also spiked sharply in other markets like Hibor, which is the Hong Kong interbank offered rate.
In the meantime, the more volatile three-month swap offer rate (SOR) also rose higher to 1.128 per cent on Tuesday, from 1.077 per cent the previous day.
But as the SOR is generally regarded as a more reactive rate in that it reflects more the US dollar movements against the Singdollar, its gain is seen as par for the course. The three-month SOR is used mainly to price corporate loans.
The Singdollar remains strong, hovering at around S$1.35 and is up 6 per cent for the year.
Mr Yong, in a reference to the favourable exchange rate enjoyed by online shoppers, said: "It's doing us a favour right now."