Jump in Sibor and Swap Offer Rate

Jump in Sibor and Swap Offer Rate
A foreign exchange store in Hong Kong. The Singdollar has weakened, following the devaluation of China's yuan and amid market speculation of further Monetary Authority of Singapore policy easing.
PHOTO: Reuters

Two key interest rates affecting business loans and mortgages in Singapore have shot up.

A weaker Singapore dollar in the wake of the devaluation of China's yuan coupled with the looming US interest rate lift-off are the main factors driving the increase.

The three-month Singapore interbank offered rate (Sibor), used to set mortgage rates, spiked to 1.00208 per cent yesterday from 0.99600 per cent on Monday. It has more than doubled since January but is still way below its peak of 3.56214 per cent in July 2006.

Its highest level so far this year is 1.02705 per cent, reached on April 9.

The three-month Swap Offer Rate (SOR) - typically used to price corporate loans - spiked to a new year's high of 1.40236 per cent yesterday from 1.33242 per cent on Monday. But that is still below its peak of 3.77193 per cent on June 30, 2006.

"The weakening Singapore dollar, a corollary of both the regional currencies nose-diving and continued market speculation of further Monetary Authority of Singapore policy easing, translates into upward pressure on SOR. Sibor tends to follow with a lag. There is likely some pricing in of the anticipated Federal Open Market Committee rate hike too," Ms Selena Ling, head of treasury research & strategy at OCBC Bank, said.

But this could add to the drag on the already sluggish Singapore economy, she warned, as rising rates will potentially affect pricing for both corporate and mortgage loans. A softer Singapore dollar can put upward pressure on local interest rates such as SOR as investors seek higher yields as compensation for holding the weakening currency.

The Singdollar recovered slightly to 1.3969 yesterday from a five-year low of 1.4130 against the US dollar on Monday.

Mizuho senior economist Vishnu Varathan sees SOR testing the 1.5 to 1.6 per cent range in the near term as volatility in currency markets is expected to increase, and Sibor rising to between 1 and 1.2 per cent in the next three months.

"Expectations of the Singdollar's depreciation have been ratcheted up very much higher and faster because of the global rout, and investors expect the sell-off in emerging currencies to continue," he said.

"They also see the MAS allowing the Singdollar to ease more if the risks of fresh deflationary shock from the slump in oil prices are significant enough, and if global financial market shocks affect the Singapore economy. Businesses and home owners are going to be sore because rates are likely to go up much higher and faster."


This article was first published on August 26, 2015.
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