Singapore interest rates fall on seasonal factors and weaker US$

SINGAPORE interest rates have fallen sharply in the second week of the New Year on seasonal factors and a relatively weak US dollar.

The more volatile three-month SOR or swap offer rate fell to 0.868 per cent on Tuesday, from 0.902 per cent on Monday. It lost 17 points from the one month high of 1.04 per cent on Dec 29. The SOR, which is used to price commercial loans, is updated late at night.

The key three-month Sibor or Singapore interbank offer rate - a benchmark for home loans - stood at 0.967 per cent on Wednesday, down for the third day. The one-month high was 0.973 per cent on Jan 5.

The increase in SOR and Sibor rates towards the end of 2016 reflected seasonal factors when liquidity tightens as traders close their books and go on holiday, said Victor Yong, United Overseas Bank interest rate strategist. The three-month SOR rose by 35 basis points over the past quarter, outpacing the three-month Sibor (up by 10 basis points).

"It then reverses course a couple of weeks into the New Year; movements are within expectations," said Mr Yong.

He also noted that the consensus expectations for the US Federal Reserve to make the first 2017 interest rate hike has shifted to June, though some are still rooting for a move earlier.

The greenback has also weakened after hitting a 14-year high last week. The US dollar index was last up 0.08 per cent at 102.010. The index hit a 14-year high on Jan 3 of 103.820, said a Reuters report on Wednesday.

The more muted US dollar movements and softer SOR and Sibor interest rates is "more of a noise, rather than a repudiation of the consensus", said Mr Yong.

"It's important not to over extrapolate the movements," he added.

Singapore dollar forward points have been heading lower as USD strength wavers, said Eugene Leow, DBS Bank interest rate strategist.

"This has pushed down the three-month SOR," said Mr Leow.

The Singapore dollar, which has been moving in a small range, was quoted at S$1.435 on Wednesday at 1.31 pm, stronger than its one-month low of S$1.452 on Dec 28.

"Looks like some volatility is being induced from the FX side again!" said Mr Leow.

Mr Yong said that UOB's projection for now is that the three-month SOR and Sibor could end 2017 at 1.35 per cent.

"The risk is towards the upside especially if regional currencies volatility pick up," he said.