Singapore households, businesses to brace for interest rate ‘shock’; Fed hike to slow Asean recovery: Economists

THE United States’ Federal Reserve’s historic rate hike will dampen growth in Singapore and Asean, while the higher interest rates will put pressure on households with mortgages and businesses looking to borrow.

But economists to whom The Business Times spoke were divided over whether the Monetary Authority of Singapore (MAS) would spring a surprise with another off-cycle move before its October meeting.

The Fed had announced on Wednesday (Jun 15) a 75-basis-point rate hike, the largest interest rate increase since 1994, to slow the surge in inflation.

Asian stock markets had opened higher after the rate-hike announcement, but the rally had fizzled out for some bourses by the time trading ended.

The Jakarta Composite Index was up by 0.62 per cent, FTSE Bursa Malaysia KLCI rose 0.94 per cent, Tokyo’s Nikkei 225 was 0.4 per cent higher and South Korea’s Kospi Index climbed 0.16 per cent on Thursday.

That momentum, however, was not sustained in Hong Kong, mainland China, Australia and Singapore, as investors digested what the steeper interest rate hike would mean for their economies and markets.

The Hang Seng Index was 2.17 per cent lower, Australia’s S&P/ASX 200 dropped 0.15 per cent, the Shanghai Composite Index slipped 0.61 per cent and Singapore’s Straits Times Index slid 0.27 per cent.

Terence Chua, senior research analyst at Phillip Securities, said the possibility of a 150-basis-point rate hike in June and July is weighing on investors even as the Federal Reserve attempts to rein in inflation.

“As rates continue to rise, Asian markets will face increasing pressure with rising rates, and non-performing loans could rise,” he said.

Yeo Kee Yan, market strategist at DBS Group Research, said equity markets tend to react to the anticipated momentum of interest rate changes rather than the absolute level of the changes. Equity markets have been pricing in steeper rate-hike expectations during this period; the volatility should taper off as the year progresses.

“We think the Singapore market equity trend will likely swing range-bound in coming months,” he said.

Gary Dugan, chief executive of The Global CIO Office, however, highlighted that the gentle recovery in China will act as a positive counterweight to the impact from the rise in US rates.

And some analysts noted that Asean equities are undemanding at this juncture.

As Christopher Wong, the South-east Asia portfolio strategist at Fidelity International, said, Asean is catching up on the back of improving fundamentals and the continued economic reopening, and is likely to benefit from shifts in supply chains and from various structural changes over the long term.

He added: “The region, especially Indonesia, offers real solace away from other major markets, which face large headwinds.”

Kelvin Tay, regional chief investment officer at UBS Asia-Pacific, said the highly rate-sensitive property market will be impacted by rising interest rates and contributes to slower domestic consumption.

“The aggressive Fed move will likely douse Singapore and Asean’s economic momentum and recovery, even with the strong reopening tailwind,” added Maybank senior economist Chua Hak Bin.

Dr Chua noted that the risks of a recession have risen: “We think a Fed funds rate above 3.5 per cent will likely tip the US and Singapore into a recession.”

Should interest rate hikes accelerate across developed economies, demand for goods and services may slow, reducing global trade and exports from Asean, said Steve Cochrane, Moody’s Analytics chief economist for the Asia-Pacific.

“Rising interest rates in Asean could dampen the pace of domestic demand just as economies open up further, following the end of Covid-19 restrictions. Any available fiscal resources may be targeted to low-income families to subsidise essential purchases,” he added.

OCBC chief economist Selena Ling agreed that rate increases could “contribute to some slowing of growth momentum if not managed carefully”, noting that this is happening in the context of the ongoing slowdown in China, a major economic engine in Asia.

On the rising interest rates, Dr Chua said Singapore corporates and households should “brace for a big interest rate shock”.

“Mortgage rates will likely climb to near 4 per cent by the end of this year and 4.5 per cent in 2023, a level not seen for almost 2 decades,” he said.

Besides mortgage rates, higher domestic interest rates will push up funding costs for businesses looking to borrow for capital expenditure or to refinance their loans, added Ling.

The economists agreed that the Fed hike has put additional pressure on central banks that have not yet started the policy normalisation process, such as Indonesia, Thailand and Vietnam.

Dr Chua expects Bank Indonesia to initiate the first policy rate hike next week, and foresees that the Bank of Thailand may call for an emergency meeting to bring forward its plans for a rate hike, rather than wait until its next scheduled meeting in August.

The pressure is also still on for central banks in Singapore and Malaysia to press on with further monetary policy tightening, said Ling.

But Clara Cheong, global market strategist at J.P. Morgan Asset Management, argued that monetary tightening can “take place a little bit more slowly” among the Asean central banks because the inflation dynamic is not as severe in the region.

“Inflation is less of a problem here than in places like the US, and the Asian central banks have been hiking ahead of the Federal Reserve. So the interest rate differentials are actually not as wide as previously observed,” she said.

Economists did not reach a consensus on whether they expect MAS to make an off-cycle move before October.

Dr Chua believes such a move is unlikely, as there is still room for the Singdollar to appreciate within the band before it reaches the upper bound.

On the other hand, Moody’s Analytics economist Denise Cheok said another off-cycle move could be on the cards.

“However, this is linked more to rising inflation pressures, rather than rate hikes by the US Fed or other central banks,” she said, noting that headline inflation is set to rise further in the coming months from supply-side stress as well as a recovering domestic economy.

Transmission of the Fed's rate hike will likely be via the government bonds and currency markets, UBS’ Tay said. This will cause corporate financing to be more expensive, as government bonds will be under pressure globally, and bond financing costs are expected to rise.

OCBC’s Ling expects Singapore and Indonesia government bonds, among Asean government bonds, to be more resilient.

“The Monetary Authority of Singapore has already done 3 rounds of tightening of its foreign exchange policy, and, as a result, we expect Singapore bonds to be better buffered against external volatility. Indonesia bonds could also be relatively resilient due to larger carry cushions and more favourable balance of payments profile,” she said.