News analysis

Fed awakens, but event lacks drama

The effects of the gradual interest rate hike are not expected to be of great concern in Singapore

Almost 10 years on, and after the recent months of tense anticipation, it finally happened yesterday.

Star Wars: The Force Awakens premiered in Singapore.

Oh, and the United States Federal Reserve also raised rates for the first time in nearly a decade.

The movie, according to critics, is a tribute to the old trilogy, filled with drama and left audiences crying out for more.

The other event lacked drama, with lines delivered by a white- haired woman in a purple suit.

Boring or not, chances are the Fed will be the story that many people will be paying attention to for years to come.

Early yesterday morning, the Fed raised interest rates by 0.25 of a percentage point, marking the end of a seven-year period in which rates were close to zero.

In doing so, Fed chair Janet Yellen expressed confidence in the US domestic economy while emphasising that future rate hikes are likely to be gradual.

"The committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the Federal Funds rate; the rate is likely to remain, for some time, below levels that are expected to prevail in the longer run," said the Federal Open Market Committee, which sets US monetary policy.

Markets, which rose on the news, cheered the "dovish" language employed by the Fed, as this means that the world will continue to enjoy low interest rates for years to come.

Projections put the US interest rate at 3.5 per cent by 2019.

The effects of the gradual interest rate hike are not expected to be of great concern in Singapore.

First, the pace of hikes from here on will be gradual. Second, there will be both winners and losers from the increases, and it is hard to say if there will be a net positive or negative impact on the economy.

One of the biggest worries here is the impact of a rate hike on the property market, with households holding the bulk of their wealth in real estate.

Mr Kelvin Tay, UBS regional chief investment officer for southern Asia Pacific, expects the Singapore interbank offered rate (Sibor), a benchmark rate that determines many mortgages here, to rise to 2 per cent by the end of next year, up from about 1.13 per cent yesterday.

But the gradual rate hike will reduce stress to the system more than raise risks within it.

Last month, the Monetary Authority of Singapore released its review of the financial system and produced two stress tests to check if rising rates will have a big impact.

For individuals, even if mortgage rates were to rise to 5 per cent, most households would still be able to service their loans.

A gradual rise in rates will make people think twice about overstretching to buy an expensive property.

The outlook for businesses was less optimistic, with many Asian and Singaporean firms holding high levels of debt. But tests also showed that most corporate balance sheets remain resilient.

On the flip side, savers, who have been punished by negative real returns, will benefit as deposit rates will rise.

The second channel that affects Singapore directly is through the foreign exchange market.

The US dollar is expected to rally strongly against its trading partners, Singapore included.

Yesterday, the greenback rose by nearly 0.7 per cent against the Singdollar to $1.4168, so consumers buying from Amazon or studying overseas will have to stump up more.

But this is offset by the potential upside to exports, which have been suffering from the slowing global economy. A cheaper Singdollar will make our goods more competitive.

What is more worrying here is whether the rate hike will induce further bouts of volatility that could hurt sentiment all round.

In particular, if growth in emerging markets continues to falter, there could be serious questions asked about the large debt that corporates in countries such as China and Brazil have taken on.

Emerging market corporate debt worth US$600 billion (S$849 billion) is due next year, with half expected to be up for refinancing, said the Institute of International Finance.

If growth remains tepid and financing costs rise too quickly, the debt problem could blow up.

That could cause another bout of market volatility that no one really wants to experience.

In this regard, there is no harm opting for a more boring approach to a major plotline, especially when the Fed is with you.

A version of this article appeared in the print edition of The Straits Times on December 18, 2015, with the headline 'Fed awakens, but event lacks drama'. Print Edition | Subscribe