Singapore rates stirring from slumber to track rising US rates

Singapore

SINGAPORE interest rates seem to be finally on an upward march, tracking higher US rates.

The three-month swap offer rate (SOR) stayed above 1 per cent the whole of last week, hitting a year high of 1.06973 per cent on Wednesday. Eugene Leow, DBS Bank rates strategist, described it as a significant development.

So far this year, those five days have been the longest stretch that the three-month SOR stayed above 1 per cent.

The three-month SOR, used to price commercial loans, shot over 1 per cent for four days at the end of last year and at the start of this year. It then sank and hit the year's low of 0.64071 on June 22. It tried climbing again in July, and rose above 1 per cent for three days, but fell back until last week, when it rose again, led by higher US rates.

Mr Leow said on Monday: "It is significant. These levels are probably a lot closer to normal, given that the three-month London interbank offered rate (Libor) is at 1.38 per cent.

"There is a lot less complacency in short-term Singapore dollar (SGD) rates currently." (Libor is the wholesale US interest rate used by banks everywhere to lend to each other; it is the most widely used benchmark for short-term interest rates.)

He added: "We are now factoring in a more modest pace of US rate hikes over the coming two years.

"The third hike of the year is likely to be delivered in December, followed by three in 2018 and another two in 2019. Regardless of who takes the Fed chair, we don't think the Fed's stance would change materially," he said.

There is intense speculation on the replacement for current Fed chair Janet Yellen, and whether she might get a second four-year term; US President Donald Trump is to make the nomination announcement this week.

There is more of a consensus that there will be further rate hikes by the Fed. Even as the Fed has already raised rates twice this year, the three-month SOR was broadly unchanged from the start of the year, Mr Leow said.

With US dollar (USD) strength reasserting itself and the Fed likely to hike by a cumulative 100 basis points by the end of next year, we suspect that upward pressures on SGD interest rates would be more apparent in the coming quarters," he said.

He expects the three-month SOR to reach 1.40 per cent by year end and 2.15 per cent by end-2018.

He added that the more sticky three-month Singapore interbank offered rate (Sibor) will also rise to similar levels. (The three-month Sibor, used as a home loan benchmark, has been unchanged at 1.12583 per cent since Oct 13.)

Heng Koon How, United Overseas Bank's head of markets strategy, noted the impact of the weakness of the Singapore dollar on the SOR. The SGD fell to S$1.3656 on Monday from the year high of S$1.3367 on Sept 8.

"The SGD nominal effective exchange rate (NEER) has weakened back to under +1 per cent above the estimated mid-point of the current neutral band; SOR has thus started to reprice higher," he said in a note late last week.

Domestic liquidity management suggests that the average SGD money market rates will continue to grind higher in the background, he said, forecasting the three-month SOR to target 1.30 per cent by end of this year and 1.50 per cent by mid-2018.