Interbank rate spikes to 2.23%

Source : Straits Times - 27 Sep 2008

THE turbulence in global financial markets hit home yesterday when the three-month Singapore Interbank Offered Rate (Sibor) shot up to 2.23 per cent from 1.76 per cent on Thursday.

The Sibor is the level at which banks lend to one another and it has a direct link to how much the rest of us pay for borrowed money.

Although rates have since eased to about 2 per cent, market watchers say the rise was a sure sign of troubled economic times ahead.

‘The spike reflects the spillover from the US funding freeze and also the increase in risk aversion in the local interbank market following the collapse of Lehman Brothers,’ said Citigroup economist Kit Wei Zheng.

‘But even before the Lehman collapse, domestic short-term interest rates were already facing some upward pressure because liquidity was normalising from previously very loose conditions.’

The Monetary Authority of Singapore (MAS) issued a statement last night saying that a ‘combination of a dislocation in global money markets and quarter-end funding pressures caused the Singapore dollar interest rates to firm’.

And to ease market funding pressures, the MAS said it has kept a higher level of liquidity in the banking system through ‘its market operations’.

The MAS also said that it remains in close contact with market participants and is ready to ‘inject additional liquidity as required’.

However, economists say that move may provide only temporary relief.

‘Our view is that while the MAS’ liquidity injection may moderate the increases of interest rates, or even bring them down somewhat, it is quite unlikely that rates will regress to previous levels any time soon,’ said Mr Kit.