Notes

Fluctuation of Interest Rates

Interest rates are one of the key indicators to the banking industry as it determines pricing for loans as well as the value of money.

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 income.

Analysis of SIBOR rate



Since 2007, the SIBOR rate has seen a huge decline which lasted around 8 years.
As seen in Figure 1, there has been a surge in the SIBOR rate the start of June 2015. This suggests that the interest rates are starting to become more volatile and less stable as compared to previous years.

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.” This suggests that the spike in rates would occur in the near future.

On the other hand, the European Central Bank (ECB) has been maintaining its rates low at 0.05% for the first half of the year, in attempt to spur economy growth. With subsequent decisions by the ECB, speculations on key interest rates would be largely influenced.

As the SIBOR is largely influenced by 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, 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.

Along with that, local interest rates have been gradually increasing due to the weakening of SGD against USD. Since the announcement by the European Central Bank to start quantitative easing and along with the election in Greece, the EUR has been depreciating. This impacts the rest of the Asian currencies, especially SGD. The depreciating SGD means that investors seek higher yields in exchange for holding the weakening currency.

With references to the above factors which might affect the SIBOR rate, it is likely that SIBOR rates would continue to fluctuate.