S’pore short rates dive, defying expectations

S’pore short rates dive, defying expectations

Analysts believe yesterday’s big move was due to intervention by MAS


(SINGAPORE) Short-term interest rates plunged yesterday to almost hit a year low, causing some analysts to scratch their heads after saying last week the bottom had been reached.


The three-month Singapore interbank offer rate (Sibor) fell 12.5 basis points to 1.25 per cent yesterday – a shade above the year low of 1.24 on April 22.


Analysts say they believe yesterday’s big move was due to intervention by the Monetary Authority of Singapore (MAS), which tried to cap the rise of the Singapore dollar.


‘The fall in the three-month Sibor may have been partly induced by MAS foreign exchange intervention,’ said Citigroup economist Kit Wei Zheng. ‘Our estimates suggest the Sing dollar has hovered at the strong side of the policy band since the start of the week, which has likely triggered MAS intervention.’


The MAS uses the exchange rate and has a strong Singapore dollar policy to fight inflation, which has reached a 26-year high. The Sing dollar rose to $1.36 against the US dollar yesterday, from $1.38 on Monday, said UOB analyst Ng Shing Yi.


But a strong Singapore dollar attracts capital inflows that put pressure on domestic interest rates, which in turn could whip up inflation further.


‘The main downside risk for three-month Sibor is a strong Singapore dollar,’ said Ms Ng. ‘With annual inflation this year likely to reach 6 per cent, MAS would likely prefer a stronger exchange rate, and that would cap Sibor gains.’


Analysts expect more whipsawing movements as MAS fights inflation with its strong Sing dollar policy while other central banks hike interest rates.


‘However I would not overplay that factor too much as I believe MAS will sterilise most of its foreign exchange interventions to moderate or neutralise the resulting downward pressure on interest rates,’ said Citigroup’s Mr Kit.


‘I doubt very much that MAS would want a further plunge in interest rates that could stoke domestic inflation pressure, especially not a time when headline inflation rates are entering uncharted territory.’


Ultimately, a more important determinant of domestic interest rates is probably foreign interest rates – not just US interest rates, but also rates in other economies that are an important part of the currency basket, Mr Kit said.


Ms Ng expects three-month Sibor to reach 1.50 by year-end. But HSBC economist Robert Prior-Wandesforde sees the rate going in the other direction.


‘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 one per cent over the next few months,’ he said. ‘With MAS thought to keep the Singapore dollar strong, this is encouraging foreign inflows, which in turn are depressing interest rates.’


Source: Business Times

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