THE key three-month Sibor or Singapore interbank offered rate jumped on Monday by 26 per cent or 0.12024 points to 0.57762 per cent from last Friday's 0.45738 per cent as the Singapore dollar (SGD) fell further, dragged down by the tumbling euro (see infographic).
New liquidity rules may also have driven the interest rate up, said an economist.
The sharp movement of the three-month Sibor, used mainly to price home loans, seems to be playing catch-up with another benchmark interest rate - the three-month SOR or swap offer rate - which is typically used for commercial loans.
The three-month SOR at 0.74893 per cent has more than tripled from two months ago when it was at 0.24776 last Nov 3. The SOR reflects Sibor and SGD fluctuations.
The SGD on Monday fell further to 1.335 from last Friday's 1.328 as the euro tumbled to its lowest in almost nine years.
The euro slid as much as 1.2 per cent after European Central Bank (ECB) president Mario Draghi last week gave his clearest signal the ECB will start quantitative easing, reported Bloomberg. The euro also weakened as Greece began an election campaign that may see victory by an anti- austerity party, it said.
"As euro continues to drop, the SGD will fall further," said Leong Sook Mei, Bank of Tokyo-Mitsubishi UFJ Asean head of global markets research.
New rules on bank liquidity have also driven demand for SGD liquid assets, said Alvin Liew, United Overseas Bank senior economist.
"The new liquidity coverage ratio (LCR) requirement that came into effect on 1 January 2015 may have driven the demand for SGD liquid assets and therefore higher funding rates," said Mr Liew.
A bank incorporated and headquartered in Singapore shall maintain at all times, a Singapore dollar LCR of at least 100 per cent and an all currency LCR ("all currency LCR requirement") of at least 60 per cent by Jan 1, 2015. This ratio, part of Basel III regulations, is to ensure that banks hold enough high-quality liquid assets to match their total net cash outflows over a 30-day period.
On the weakness of the SGD and other Asian currencies and the speed of fall which took many by surprise, they were dragged down by the rapid depreciation of the euro in the past few days, said Ms Leong.
From July 1 to Jan 5, 2015, the ringgit has fallen 9.3 per cent, the Korean won is down 9 per cent, while the SGD and Taiwan dollar are both down 6.5 per cent. The Indonesian rupiah is down 5.9 per cent.
Ms Leong thinks the SGD will remain weak in the first half of this year given the euro's woes and the expectations of a hike in US interest rates, which some say could be in June.
"In tandem with the (expected) US rate hike of June 2015, the dollar will be well bid, and once that story is more fully priced, the market moves to the next story," she said.
For the second half of the year, some analysts expect the SGD and other Asian currencies to stabilise as these countries export more to a stronger US economy and also benefit from cheap oil prices.