SINGAPORE's key lending rates jumped on Wednesday as the Singapore dollar fell sharply to a five-year low on two days of yuan devaluation.
The three-month Sibor or Singapore interbank offered rate, which is used to price home loans, jumped to 0.93450, up 0.05542 from Tuesday's 0.87908. The gain was 6.3 per cent and took the key interest rate nearer to the year-high of 1.02705 on April 9.
The three-month SOR or swap offer rate surged 0.07782 to 1.07461 per cent. The gain was a bigger 7.8 per cent; SOR is used typically to price commercial loans. The SOR year-high was 1.13207 on March 24.
Analysts said that local interest rates and the Singdollar are in overshoot mode as they react to the shocking yuan devaluations of the past two days.
While the Sibor and SOR were expected to rise in line with a move to higher US interest rates - slated to happen this quarter - which would have caused the Singdollar to weaken, the yuan devaluation has short-circuited the process.
But the long-term rise in Sibor and SOR remains intact as local interest rate movements depend on the US rates as determined by the Federal Open Market Committee (FOMC) and the Singdollar, said analysts.
"There may be a knee-jerk reaction higher for Sibor and SOR," said Eugene Leow, DBS Bank economist. "While these short-term interest rate fluctuations depend on the SGD's performance versus the USD, the longer term trajectory for SGD rates still depends on how high and how fast USD rates are going to rise over the next few years."
"To a certain extent," said Selena Ling, OCBC Bank economist, "the CNY (yuan) moves may have pre-empted the FOMC liftoff bout of volatility. Have to remember financial markets are prone to over-shooting - classic example is Shanghai Composite Index falling by 1.06 per cent today and STI slumping by 2.9 per cent, which is telling that market confidence is very fragile right now. So, got to wait for the dust to settle a bit."
The three-month Sibor spiked by around 20 basis points in January and then by around 35 points in March in the run-up to the April monetary policy statement (MPS), noted Ms Ling. The Monetary Authority of Singapore has two scheduled MPS - one in April and the other in October - when it reviews the exchange rate.
"So the current episode," Ms Ling said, "is eerily reminiscent of another 'tantrum' since the SOR has moved more substantially due to the SGD weakness, and market speculation of further MAS monetary policy easing is rising again. Where SOR goes, Sibor may follow with a lag."
United Overseas Bank said in a research note that higher interest rates would come from further Singdollar weakness and the speculation for an October easing.
"Further SGD weakness due to RMB volatility or increase in MAS policy speculation could trigger greater USD hedging requirements akin to what was observed in Q1 2015, and we recognise this risk by increasing our Q3 forecasts of SOR while keeping our projections from Q4 onwards intact."
The Singdollar is likely to weaken to S$1.45 this quarter before recovering a little to S$1.43 in Q4 and then fall further to S$1.46 by Q2 next year, said UOB.
Its forecast for three-month Sibor is to hit 1.25 per cent this quarter before pulling back to 1.15 per cent in Q4. But the rate will resume moving higher to 1.27 per cent by Q2 2016.
SOR is forecast to reach 1.35 per cent this quarter and easing to 1.25 per cent in Q4; it will rise back to 1.35 per cent in Q2 2016.