The only way is up?

The only way is up?

 

Some economists say short-term rate has bottomed out, but they expect increases to be tiny

 

By Michelle Tay

 

THE period of rock-bottom interest rates may be over, with some experts tipping that levels in Singapore are set to head north – but at a gentle pace.

 

The three-month Singapore Interbank Offered Rate (Sibor) – the level at which banks lend to each other – is at 1.3 per cent. That is still a remarkably modest rate, but it is up from the 12-month low of 1.25 per cent a few days ago.

 

It is also dramatically lower than the 3.1875 per cent in March last year, before rates began plunging.

 

Economists expect rate rises to be tiny, but home owners might think it smart to refinance mortgages before rates creep up.

 

The rates pressure is coming from the United States. The Sibor tends to track US rates, which are tipped to rise by 50 basis points by year end.

 

Dr Chua Hak Bin, Asian strategist at Deutsche Bank Private Wealth Management, said: ‘I believe the short- term interest rate has bottomed out. Our rates track the US rates quite closely, and there is a sense that the Fed, after a 325 basis point cut, is due to raise rates soon.’

 

He expects rates to rise to 1.4 per cent in 12 months and to go back to above 2 per cent in three years.

 

OCBC Bank economist Selena Ling said: ‘We would expect the short-term interest rate to rise to 1.5 per cent by year end. It won’t rise sharply because the Monetary Authority of Singapore (MAS) is still on a tight monetary policy to combat inflation.’

 

But HSBC economist Robert Prior-Wandesforde sees things differently: ‘We are not expecting a Fed hike before the end of this year, and I’m still looking for the three-month Sibor to fall to 1 per cent over the next few months. With the MAS thought to keep the Singapore dollar strong, this is encouraging foreign inflows, which in turn is depressing interest rates.’

 

One indicator of where short-term rates might be headed lies in the bond market, where long-term interest rates seem to have spiked.

 

The 10-year Singapore Government Securities bond yield was 2.73 per cent in the middle of last month, but has now risen to 3.6 per cent.

 

United Overseas Bank’s treasury research head, Mr Jimmy Koh, said: ‘We have inflation climbing in the region, making long-term rates move up. Over time, this could drag up short- term rates.’

 

He also noted that central banks in Indonesia and the Philippines have already started raising short-term interest rates.

 

Deutsche Bank’s Dr Chua said: ‘Long-term interest rates are determined by long-term views on growth and inflation. As risk appetite returns, these might move up faster than the short-term rates because of inflation risks, and the Fed may not be able to move as fast as we hope.’

 

Whatever the cause, rising interest rates affect everyone, from bank savers to homebuyers and retirees looking for a good return on their cash.

 

If the Sibor rises, so might bank deposit rates in time to come. A DBS Bank spokesman said: ‘Our rates will move in tandem with market forces.’

 

Home owners might also think it prudent to switch to a fixed-term mortgage now as rates are linked to the Sibor.

 

Mr Prior-Wandesforde said ‘it is worth thinking seriously about shifting to a fixed rate’.

 

He added: ‘Although fixed-term mortgage rates haven’t come down that much during the recent decline in short-term market rates, they also didn’t rise as much as one would have expected during the period of rising short-term rates from 2005 to 2006.’

 

Source: Straits Times

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s