Interest on home mortgages and business loans in Singapore will increase further next year after this week's historic rate rise by the United States Federal Reserve.
However, the rises will not be too drastic as the US monetary tightening cycle, which kicked off on Thursday, is expected to be gradual.
But some economists believe this may dampen consumer spending next year as households allocate more funds to servicing debt. Others, however, say local interest rates may not rise as fast, given expectations of the Monetary Authority of Singapore's (MAS) "accommodative" stance in the face of sluggish domestic growth and subdued inflation. The Fed raised interest rates by 0.25 percentage point - its first rise since 2006 - taking the Fed funds rate, or the rate range within which banks offer to lend to each other overnight - to between 0.25 per cent and 0.5 per cent.
Ms Monica Lim, a condo owner with a $500,000 loan pegged to the one-month Singapore interbank offered rate (Sibor), told The Straits Times she is not too worried about rising rates. She has seen her monthly loan instalment rise by $160 in the past year but said the rental yield from her apartment "covers her entire instalment with buffer to spare".
And, she is eligible to refinance her loan next February. "If my bank doesn't offer me a good Sibor rate, I'll switch to a fixed-rate loan at this bank or another," she said.
Lending rates in Singapore were rising even before the Fed move, due to the Singdollar weakening against the US dollar.
The key three-month Sibor, which is used extensively to price home loans, was unchanged at 1.13375 per cent yesterday from Thursday amid a still slowing China and tepid Asian growth story.
The three-month Sibor is still a touch below the 12-month high of 1.13958 per cent on Sept 17. But it is almost three times the 0.44802 per cent level seen a year ago. The three- month SOR or swap offer rate - a benchmark for commercial loans - rose at a faster pace to a fresh year- high of 1.62603 per cent yesterday from 1.61129 per cent on Thursday.
SORs are even higher than Sibor levels as the Singdollar is expected to weaken further against the US dollar, Standard Chartered economist Jeff Ng said. He sees only one hike next year, in March. "We see the Fed pausing next June and September. Total debt is high, the US economic cycle is mature, the US dollar is strong and inflation is structurally soft. Growth could weaken by the end of the year, and growth risks could prompt the Fed to return to zero rates. We forecast US rates to be back near zero by March 2017."
Local short-term interest rates are also influenced by the MAS, which has eased monetary policy twice this year to support the export-dependent local economy against the backdrop of a global trade slowdown and heavy deflationary pressures.
The MAS is expected to leave its policy settings unchanged at the next meeting in April, as "downside risks to the economy in the first quarter may necessitate an accommodative stance", Mr Ng said.
Ms Selena Ling, OCBC Bank's head of treasury research and strategy, expects a 25 basis point hike each quarter next year. "As long as the Fed's future moves are well-telegraphed and gradual, businesses and consumers will have time to adjust. What financial markets dislike are 'surprises'... On the flip side, rising deposit rates and yields also help savers and investors."
HSBC Asia-Pacific economist Joseph Incalcaterra, who expects two more rate hikes next year, sees SOR reaching 2.3 per cent by the end of next year.
Sibor may rise to 2 per cent by the end of next year, Mr Kelvin Tay, regional chief investment officer at UBS Wealth Management, said.
UBS sees another 75 basis points of rate hikes next year, which could be negative for the property sector.
"A further property price decline of 5-10 per cent in 2016 could set the stage for a recalibration of stringent property measures in the second half of 2016," Mr Tay said.
UOB rates strategist Victor Yong sees the three-month Sibor and SOR reaching 1.5 per cent and 1.7 per cent respectively by the end of the year. "We expect the Fed hike cycle to underpin an upward trajectory for Sibor and SOR."
