Sibor begins long-awaited slide; slips to 1.8% after hovering at 1.9-2% the past 10 months

Singapore

SINGAPORE's key short-term interest rate, which is used to price home loans, has finally begun its long-awaited slide following the latest cut by the US Federal Reserve to give a fillip to the world's biggest economy.

Still, home buyers should not hold their breath because the three-month Sibor or Singapore interbank offered rate has remained high, relative to other benchmarks which have tumbled.

For the past 10 months, the three-month Sibor has hovered around 1.9-2 per cent amid three rate cuts by the Fed this year. Last week, it finally budged a bit more, and on Tuesday it slipped to 1.8 per cent.

The more reactive three-month SOR or Singapore swap offer rate has tumbled in line with global rates; it was 1.46 per cent on Monday, down from this year's high of 2 per cent on March 1. The SOR rate is typically used to price commercial loans.

Eugene Leow, DBS Bank rates strategist, said: "The SOR has fallen a lot, it's more sensitive to FX (foreign exchange) moves. The US dollar is weak, and pushes down the Singapore dollar interest rate."

The greenback has fallen to S$1.36 against US$1, from a 52-week high of S$1.39 in September. The recent weakness of the US currency is due to investors' perception that a hard Brexit has been avoided for now, and US China trade tensions have been taken down a notch. The Monetary Authority of Singapore (MAS) latest three-month bill has also fallen, he said. It was 1.7 per cent last Friday.

"The 3M Sibor is catching down towards the 3M SOR and 3M MAS bill, albeit very slowly," said Mr Leow, adding that the Sibor tends to lag.

Sibor measures interbank lending and "banks' liquidity is tighter", though it is difficult to say to why, added Mr Leow.

MAS bills and SOR capture borrowing costs across a wider part of the financial system, he acknowledged.

"I think the SOR and MAS bills are somewhat fairly valued and will likely hover around current levels through to year-end, given our view that the Fed is done with "insurance cuts", he said.

According to Selena Ling, OCBC Bank's head of treasury research and strategy, the latest Fed rate cut was perceived as a hawkish cut in the sense that the Fed appeared to be signalling a pause rather than telegraphing further impending rate cuts.

"However, the (Sing dollar) domestic funding conditions appear to be somewhat elevated across the year-end," said Ms Ling. "Sibor has also generally been more stable than SOR which appears to be more reactive to FX expectations and broad US dollar sentiments," she said.

Over at UBS Global Wealth Management, its regional chief investment officer Kelvin Tay said he expects the 3M Sibor to trend down gradually.

"Our forecast calls for 3M Sibor to settle at 1.6 per cent in 2020," he said. The lower interest rate environment will likely impact the interest-rate sensitive sectors in Singapore positively, he said.

On a year-to-date basis, SG Reits are up 20 per cent and currently trading at around 360 basis points above 10-year Singapore government bonds, which is the highest globally, he said. "Although valuations are rich, we do expect the sector to remain resilient, given the relatively easy monetary policy conditions globally."

"The lower interest rate environment is also likely to be positive for the Singapore property market, especially the residential market. With HDB prices holding up, lower interest rates will likely improve affordability and at the same time ease the interest servicing burden on households," said Mr Tay.

Victor Yong, United Overseas Bank interest rate strategist, sees more easing of US monetary policy next year due to slow growth which will in turn put further pressure on Singapore's interest rates.

"Our take on the US Fed policy going into 2020 leans towards further US monetary policy easing due to modest prospects on economic growth. We have pencilled in the next interest rate cut for the first quarter of 2020," he said.

"Downside potential for SOR and Sibor will remain in place based on our view that the US easing cycle has not yet reached completion," said Mr Yong. "We see 3M SOR and 3M Sibor at 1.6 per cent and 1.8 per cent respectively by end 2019 and 1.45 per cent and 1.55 per cent by the end of the first quarter of 2020," he said.

"If the Sing dollar currency volatility continues to be contained as it has been for 2019, then this will also reduce the possibility of SOR and Sibor diverging from US rates."

READ MORE:

Hammer time: What the auction numbers are saying about the property market