SINGAPORE'S key interest rates continue to rise to levels last seen in 2008 as worries over China's woes persist.
The benchmark three-month Singapore interbank offered rate (Sibor), typically used to price home loans, rose for the fourth consecutive day to 1.25200 per cent on Wednesday; it was 1.19125 per cent on Jan 7 and 1.18513 per cent on Dec 31.
The three-month swap offer rate (SOR), mainly used to price commercial loans, rose to 1.75581 per cent on Tuesday, up 0.03083. It was 1.70064 per cent on Dec 31.
Worries about how closely Singapore's economy is intertwined with China is weighing on the Sing dollar and putting pressure on the Sibor and SOR.
It means the Sing dollar, which has lost 1.8 per cent since the beginning of the year, is expected to continue to weaken and interest rates will rise to compensate for holding on to a falling SGD. It stood at 1.4349 against one US dollar as at 4.05pm.
Commenting on the SOR, United Overseas Bank rate strategist Victor Yong said: "Persistent negative bias on SGD currency remains and episodes like China risk at the start of the year will exacerbate the underlying conditions and lead to SOR spikes."
The yuan has lost 1.5 per cent year-to-date while the Shanghai Composite Index has tumbled 16 per cent in 2016.
Other Asian currencies have been dragged lower amid yuan depreciation, but the Sing dollar is among the most impacted.
China is Singapore's largest trading partner and the second-largest source market for inbound tourists; Singapore became China's largest overseas direct investment destination in Asean in 2014. Singapore has been China's largest foreign investor since 2013.
The transmission effects appear to be stemming more than the foreign-exchange channel - a slightly firmer broad dollar and lingering suspicion over how much latitude the People's Bank of China will impart to the RMB against the trade-weighted RMB index, said Selena Ling, OCBC Bank economist.
"The Singapore economy is also seen as more leveraged to the China slowdown story. The ongoing crude oil slump is also interpreted as potentially giving Asian central banks more leeway on the monetary policy front amid a lackluster economic backdrop," said Ms Ling.
There is "recurring market speculation that even lower crude oil prices could afford Monetary Authority of Singapore (and other Asian central banks) more leeway on the monetary policy front (just like back in Jan 2015)", she added.
The Monetary Authority of Singapore surprised the market in January 2015 with an off-schedule easing before its April review.
OCBC's current forecast is for the USD-SGD to head towards 1.4670 before the year is out, and for the three-month Sibor and SOR to similarly test the 2 per cent handle.
"This is also predicated on the monetary policy status quo (which assumes that crude oil prices do not continue to slide towards the US$20 handle) and some stabilization in market sentiments towards the RMB trade-weighted index."
Oil has dropped below US$30 a barrel in New York for the first time in 12 years, said Bloomberg.