Key Singapore interest rate Sibor at highest level in more than six years

SINGAPORE - A benchmark local interest rate, to which many mortgages here are pegged, has surged to a level not seen since December 2008.

The three-month Singapore interbank offered rate, or Sibor - the rate at which banks lend money to one another - surged to 1.00129 per cent today, although it is still fairly low by historical standards.

That marked a rise of more than 23 per cent since March 6, after a stronger-than-expected American jobs report stoked expectations that the Federal Reserve could raise interest rates sooner than previously thought.

Many mortgages here are pegged to the Sibor, which means they rise and fall in tandem with movements in the Sibor.

The latest rise came despite signals from the United States central bank this week that it will keep rates close to zero for longer than expected.

Market participants say the Fed's tightening cycle this time will be slow given the uncertain growth outlook overseas while US inflation remains subdued.

Barclays economist Leong Wai Ho said pundits are bearish on the Singapore dollar, leading to the Sibor hike.

Sibor, the rate at which banks lend to each other, is closely correlated to US rates. The rate has more than doubled since the start of the year when it was 0.45 per cent, but it is still low by historic standards. It hit a high of 3.56214 per cent on July 31, 2006.

"Now that the 1 per cent resistance level has been overcome, we expect Sibor to hold at 1 to 1.15 per cent levels," remisier Alvin Yong said. "Many were expecting Sibor to reach 1 per cent by year end after the rate hikes start. Although Sibor can run ahead of the US rate hike, we weren't expecting such a large extent."

A weaker Singapore dollar has led to a higher Sibor as investors demand higher interest rates to compensate for lower returns from holding the local currency.

The Singdollar has been weakening against the greenback since last year, with the US Federal Reserve signalling its intent to end its loose monetary policy and to raise interest rates.

After the Fed's announcement last week, the Singdollar fell to a year-low of 1.3929 against the US dollar on March 18 - its weakest since May 25, 2010, when it hit 1.4185. It has since clawed back some ground and is trading at 1.3673 as at 2.18 pm.