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Pressure on Sibor, SOR continues in the New Year, rising to around 1%
LOCAL interest rates remain under pressure, and have continued to rise in the New Year.
The key three-month Sibor - a benchmark used to price mortgages - stood at 0.96918 per cent on Wednesday, up marginally from the previous 0.96893 per cent. Sibor stands for Singapore interbank offered rate, and is updated at 11.30am. The three-month SOR or swap offer rate typically used to price corporate loans was unchanged at 1.01175 per cent on Tuesday. The SOR rate is updated late at night.
The pressure on Sibor and SOR will continue in line with expected hikes in US interest rates.
The 3M Sibor, 3M SOR and 3M Libor have all converged around one per cent after the US Federal Reserve hiked rates in December, said Eugene Leow, DBS Bank interest rate strategist.
Libor, which stands for London interbank offered rate, is the benchmark for US dollar corporate borrowing.
Traditionally Sibor and SOR follow or track Libor movements but can deviate due to foreign exchange or liquidity issues, said Mr Leow. And this close tracking was "temporarily dislodged" in 2015 and for the greater part of 2016 when Singapore was flush with liquidity and the US dollar was weak.
But in the past few months, the three rates began to converge again.
The 3M SOR - which is more volatile - rose by 35 basis points over the past quarter, outpacing the 3M Sibor (up by 10 basis points) and the 3M Libor (up by 15 basis points).
"The sharper rise in SOR is due to catch-up to the Sibor. In early Q416, the SOR was inordinately low as the market was not anticipating Fed hikes and still expecting US dollar weakness to persist. The change in USD/SGD sentiment prompted the 3M SOR to close the gap with the 3M Sibor," said Mr Leow.
Under current conditions where US dollar strength is playing out in an orderly fashion, these three rates would be expected to track higher as the Fed normalises monetary policy, he added.
"Now they're close to each other is normal," he said. "On balance, for every 100 basis point increase in the 3M Libor, we would expect the 3M SOR and the 3M Sibor to rise at a more moderate pace of around 70 basis points."
DBS expects the Fed to be more aggressive in raising rates, and is projecting four hike rates in 2017, at 25 basis points each time, for a total one per cent, he said.
Following last month's Federal Open Market Committee (FOMC) meeting, expectations were raised for three hikes in 2017, up from two previously.
But Selena Ling, OCBC Bank head of treasury research & strategy, thinks that the Fed may under-deliver.
"Our view is that the Fed could again over-promise and under-deliver on its rate hike expectations (ie two of the three 25 basis points rate hikes), but the pressure is still on for the three-month Sibor and SOR to climb towards the 1.5 per cent-1.55 per cent region respectively as the year progresses, up from the near one per cent handle currently."