The US Federal Reserve's decision on Wednesday (Dec 14) to raise its benchmark short term interest rate by a quarter percentage point was widely anticipated. But the real kicker is that it signalled it may raise interest rates three more times in 2017, one more than what it had predicted in September due to expectations of a massive US government stimulus under president-elect Donald Trump.
Here's what it means for Singapore consumers and businesses:
1. Weaker Singapore dollar
The US dollar has been chief beneficiary of the Fed's rate hike, especially after it flagged it would step up the pace of rate increases, as higher rates leads investors to pour into US dollar assets.
The greenback has already been strengthening against most currencies, rising 3.4 per cent against the Singdollar since the Nov 8 US elections on expectations that if Mr Trump goes on a US spending spree, that could result in faster inflation.
On Thursday (Dec 15), the US dollar rose as much as 1.4 per cent against the Singdollar to 1.4436 and was trading 1 per cent up as of 2.25pm.
2. Higher rates for home loans
The Fed's decision to lift the federal funds rate, which is what banks charge each other for overnight loans, is likely to push up rates for everything from mortgages and credit cards to business loans.
If you are already making payments on mortgages or are planning to buy another property, you may want to factor in the likelihood of making higher interest payments depending on the type of mortgage loan you have. Already, some banks here have seen a rise in home loan refinancing inquiries to try to lock in favourable interest rates before they rise further. More home owners are also choosing to take up a fixed rate home loan package, which offers more stability.
Since banks will be able to charge a bit more for loans, they will also have a little more leeway to pay higher interest rates on customer deposits. But don't expect a fast rise in your savings accounts or fixed deposit rate. Singaporeans have been keeping a big share of their cash in banks, and so banks may not have to offer big incentives to draw more deposits so they can lend more.
3. Harder for stocks
Typically when interest rates rise, fixed income investments become more attractive because of their higher yields and, therefore, stocks become less attractive as a result. Singapore stocks fell 0.8 per cent so far today after the Fed raised rates for the first time in a year and suggested a faster pace of tightening than investors were positioned for.
4. Mixed for companies
High interest rates make it more expensive for companies to borrow money to finance their debt, operations, payroll and purchases. Importers, who make payments in US dollars, will also likely suffer when the greenback strengthens against the Singdollar unless they have hedged against possible weakness in the currency or have locked in on an exchange rate.
On the flip side, higher interest rates mean that the US currency will strengthen, making exports from Singapore to the US cheaper and therefore more attractive. Singapore, which counts the US as one of its top trading partners, is likely to benefit as growth means more demand for goods and services.
5. Not good for gold
The yellow metal has tumbled 12 per cent to US$1,143.12 in the past month, partly in anticipation of higher rates as well as a surge in US stocks to records since Mr Trump's election. Gold is highly sensitive to rising interest rates, as these lift the opportunity cost of holding the metal.
6. Bearish on oil
Crude prices weakened on Thursday as higher interest rates pulled money away from commodities and into the US dollar. This is because higher interest rates strengthen the US dollar - in which oil is traded - against other currencies, making crude oil supplies more expensive and reducing the demand for oil further.
