Notes

Fluctuation of Interest Rates

Interest rates are one of the key indicators to the banking industry as it determines pricing for loans as credit costs.

Singapore Interbank Offered Rate (SIBOR) is commonly used as a reference rate at which banks offer to lend to other banks in the interbank market. This rate will then be used as a guideline for banks to price their commercial and property loans at a market rate. Since many banks offer housing loans pegged to SIBOR rate, any movement in the rate would cause an impact on their net interest income.

Analysis of SIBOR rate

The SIBOR rate has maintained low for about 8 years since 2007. Towards the end of 2014, here has been a surge in the SIBOR rate as shown in Appendix 1. This suggests that the interest rates are starting to become more volatile compared to previous years. This is the result of the following factors:

Factors Affecting SIBOR

Key Interest Rates
Ever since the announcement US federal’s decision last year to introduce a key interest rate hike, SIBOR rates have been gradually increasing, in anticipation of the future rate hike. In line with that, Federal chairman Janet Yellen has stated that the “US central bank will start raising rates, probably as soon as September”, confirming that the spike in rates would occur in the near future.

As the SIBOR is highly correlated with official interest rates, this would expose the SIBOR to greater volatility.

Weakening of Singapore Dollar
Due to Monetary Authority of Singapore (MAS)’s plans to ease monetary policy by slowing the pace it allows SGD to appreciate against other currencies, SGD has also been falling since January 2015. This is in line with its plans to stimulate growth in Singapore by increasing the number of exports in the country.

EUR has been depreciating gradually, since the announcement by the European Central Bank to start quantitative easing and the Greek debt crisis. This has a negative impact the rest of the Asian currencies, especially SGD.
The depreciating SGD means that investors seek higher yields in exchange for holding the weakening currency. This results in the gradual increase in local interest rates due to the weaker SGD.

Tighter liquidity requirements
Under the implementation of the new Basel III banking rules, banks are required to set aside more funds as a buffer by maintaining their liquidity coverage ratio at a minimum of 60%. This might imply that fewer funds are available for lending out and hence rising up interest rates.
http://www.ft.com/intl/cms/s/0/5e51c880-a69d-11e4-89e5-00144feab7de.html#axzz3hANIAszR
http://www.sgmoneymatters.com/factors-impact-mortgage-interest-rates/
http://www.thepropertyeffect.com/mortgage-payment-hike-likely-as-key-rate-rises-7-january-2015/