Singapore's key short-term interest rate hits 7-year high

[SINGAPORE] Singapore's key short-term interest rate rose to its highest level since 2008 on Wednesday, after the Singapore dollar set a six-year low this week as investors braced for a possible rise in US interest rates.

The three-month Singapore interbank offered rate (Sibor), which is used to set interest rates on mortgages, rose to 1.07508 per cent, its highest level since November 2008.

Expectations for a softer Singapore dollar can put upward pressure on local interest rates as investors seek higher yields as compensation for holding the weakening currency.

The Singapore dollar had touched a low of S$1.4296 versus the US dollar on Tuesday, the lowest level for the city-state's currency since September 2009.

The Singapore dollar later pulled up from that low, and was trading at S$1.4150 versus the US dollar on Wednesday.

US jobs data released last week was seen as leaving open the possibility of the Federal Reserve raising interest rates at its Sept 16-17 policy meeting, and that had helped drag the Singapore dollar lower versus the US dollar.

Higher US rates might not be the only headwind the Singapore dollar faces. Some economists see an increasing risk of Singapore slipping into a technical recession and more central bank monetary easing, after industrial production in July was weaker than expected.

Singapore's monetary policy is focused on managing the exchange rate, rather than interest rates, due to the trade-reliant nature of the city-state's economy.

The central bank, which holds its next policy review in October, manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its nominal effective exchange rate (NEER).

REUTERS