News analysis

Borrowing costs may rise, but stronger US economy good for Singapore

The move by the Federal Reserve to raise its benchmark interest rate for the second time in three months is a sign of the central bank's confidence in the stability of the US economy.

The widely anticipated hike was accompanied by a further show of confidence: A description of the US central bank's plans to start reducing its portfolio of more than US$4 trillion (S$5.5 trillion) in bonds later this year.

The Fed had bought the bonds - effectively printing money - and slashed interest rates close to zero in response to the 2008 global financial crisis to keep the economy from collapsing. Many central banks worldwide took similar steps.

The impact on Singapore of the latest rate hike is likely to be mixed. Higher US interest rates tend to raise borrowing costs here, but a strengthening US economy is good news for exporters.

The Fed has now raised rates four times since December 2015, as part of efforts to "normalise" interest rates. Market watchers are expecting one more rate hike this year.

The latest move comes after the US jobless rate hit a 16-year low of 4.3 per cent last month. While economic growth was relatively soft in the first quarter, the Fed believes the economy is on a steady footing.

Higher US interest rates means higher borrowing costs for households and companies in Singapore. These include rates for mortgages, credit cards and corporate loans, and also bank savings accounts, which will be a boon to savers.

The three-month Sibor or Singapore interbank offered rate - used to price some home loans - was unchanged at 0.995 per cent yesterday. The Sibor is typically highly correlated with US interest rates and has been gradually rising in tandem with Fed hikes.

While US central bankers are signalling that borrowing costs are expected to continue inching up in the coming years, this underscores an upward trend in US economic activity, which is good news for trade-dependent Asia, including Singapore.

Some segments of Singapore's economy are already benefiting from a pick-up in growth in developed economies such as the US. Electronics manufacturing surged in the first half of this year on the back of rising global demand for semiconductors and related gear.

In addition, a rate hike should be positive for the Singapore equities market as the banking sector, which makes up 40 per cent of the Straits Times Index, is likely to see net interest margins expand, said Mr Kelvin Tay, regional chief investment officer of UBS Wealth Management.

He expects the three-month Sibor to hit 1.8 per cent in a year's time. Mr Tay said higher interest rates are also likely to crimp the nascent property market recovery unless economic growth ramps up markedly.

Higher US interest rates have significant implications for Singapore. But the fact remains that rates are still way below historical averages. Rises so far have been both widely anticipated and very gradual, causing few market tremors.

Barring surprises or major shocks, Singapore should benefit from a more robust US economy.

A version of this article appeared in the print edition of The Straits Times on June 16, 2017, with the headline 'Borrowing costs may rise, but stronger US economy good for S'pore'. Print Edition | Subscribe