S$ strength a boon to borrowers, but for how long?

The Singapore dollar held its ground yesterday, despite the central bank signalling that it would maintain a currency policy of zero appreciation against a basket of its peers.
The Singapore dollar held its ground yesterday, despite the central bank signalling that it would maintain a currency policy of zero appreciation against a basket of its peers. PHOTO: ST FILE

The Singapore dollar held its ground yesterday, despite the central bank signalling that it would maintain a currency policy of zero appreciation against a basket of its peers.

The Singdollar stayed at about $1.396 to one greenback, as expected by currency traders.

One happy outcome of the Singdollar's unfettered rise is that it has kept a lid on short-term domestic interest rates, since a net inflow of foreign funds has created more liquidity in the banking sector.

The Singdollar has gained steadily against the United States dollar this year, driven by a weaker greenback after doubts crept in over how inflationary President Donald Trump's policies can really be.

The three-month Singapore Interbank Offered Rate (Sibor), a key benchmark to price most home loans, was at 1 per cent yesterday.

This is higher than the 0.4 per cent norm in 2014 when signs first emerged that the era of cheap money was drawing to a close, but off the high of 1.254 per cent last January, when the prospect of more rate hikes from the US Federal Reserve seemed more threatening.

In fact, Sibor has been relatively soft this year and has not matched the upward climb in its equivalent US benchmark, said ANZ senior strategist Irene Cheung.

"This is in contrast to 2015 and much of 2016 when Sibor was trading above the US Libor," she said.

In other words, a strong domestic currency is sparing borrowers here the full brunt of the US rate hikes.

But more volatility can be expected, say analysts, who tip that the three-month Sibor will end the year anywhere between 1.25 per cent and 1.38 per cent.

Mizuho Bank economist Vishnu Varathan thinks Sibor could reach 1.38 per cent by the year's end, factoring in "more exchange rate volatility".

It is tough to make a call on the exchange rate. On the one hand, Singapore is opting to keep the Singdollar off its traditional path of modest and gradual appreciation "for an extended period", which could limit its strength.

On the other hand, Mr Trump has also expressed his opinion that the US dollar "is getting too strong, and partially that's my fault because people have confidence in me. But that's hurting. It's very, very hard to compete when you have a strong dollar and other countries are devaluing their currency".

Maybank Kim Eng economist Chua Hak Bin expects Sibor will climb to a more subdued 1.3 per cent this year, since "easy liquidity conditions, as reflected in relatively high deposit-to-loan ratios, could dampen interest rate increases".

OCBC economist Selena Ling thinks the US Fed could deliver two more rate hikes this year, but has revised her Sibor forecast to 1.25 per cent. "With the Singdollar bearing the brunt of the adjustments from the unwinding of the Trump trade (bullish US equities and the US dollar) and Singapore maintaining its neutral policy stance for an extended period, the potential for Sibor to stay subdued for longer remains a risk at this juncture," she said.

A version of this article appeared in the print edition of The Straits Times on April 14, 2017, with the headline 'S$ strength a boon to borrowers, but for how long?'. Print Edition | Subscribe