Short-term rates leap to about 2%

Source : Business Times - 28 Sep 2008

SHORT-TERM interest rates here jumped again yesterday, sending it higher than the US Fed Fund rate of 2 per cent and causing the Monetary Authority of Singapore to inject money into the system.

Underlining the seriousness of the situation, the MAS in a rare statement confirmed that it had intervened in the interbank market.

‘A combination of a dislocation in global money markets and quarter-end funding pressures caused Singapore dollar interest rates to firm this morning. To ease market funding pressures, MAS kept a higher level of liquidity in the banking system through its market operations,’ it said last night.

The 3-month Sibor or Singapore interbank offer rate was fixed by the Association of Banks at 2.23 per cent yesterday, up from 1.76 per cent on Thursday.

‘Rates have since eased to about 2 per cent,’ the MAS said.

MAS said that it was prepared to inject additional liquidity, if required. The 3-month Sibor is now almost double of what it was a month ago.

This could hit home loan borrowers who have been enjoying low interest rates, especially those on interbank pegged rates.

A month ago, on August 26, the 3-month Sibor was 1.18750, up slightly from a low of one per cent on August 7.

‘Banks are tightening credit to each other and to their customers,’ said Matthew Wilson, Morgan Stanley analyst.

Capital is scarce globally and banks are responding by rationing or preserving capital, he said. ‘Refinancing may become more difficult and we risk entering a vicious credit/capital cycle as de-leveraging takes hold,’ said Mr Wilson.

‘Unless risk aversion subsides and/or the Fed cuts the Feds rates, upward pressures on domestic interest rates could persist for awhile,’ said Kit Wei Zheng, Citigroup economist. Despite coordinated action by global central banks to inject liquidity, USD interest rates could stay high near term, pulling up SGD interest rates as well, said Mr Kit.

Ho Woei Chen, United Overseas Bank economist noted that with the exception of the Asian financial crisis, the 3-month Sibor has always been trading at a discount to the Fed funds target rate which is currently at 2.00 per cent. ‘We expect the current phenomenon to be temporary,’ she said.

The spike in wholesale interest rates will hurt home loan borrowers who peg their loans to Sibor. ‘Volatility in interest rates causes mortgage instalments to vary with each re-pricing period,’ said Kevin Lam, UOB head of loans.

‘This could affect customers’ personal cashflow management. For example, if the Sibor rate increases by one per cent, a customer with a $500,000 loan (on 20 years loan tenure) will see his annual instalment increase by $2.928,’ said Mr Lam.