No Fed rate lift-off: SOR plunges but Sibor dips just a bit

Interest rates for short-term commercial borrowing here have plunged over the past month, but home-owners are not getting as much reprieve as mortgage-linked rates have fallen only a fraction.

A reversal in emerging-market risk sentiment has extended the pullback in the three-month swap offer rate (SOR), which prices commercial loans, to below 1 per cent, a level not seen since Aug 6. SOR fell to 0.99194 per cent yesterday, down from 1.35631 per cent on Oct 2, and nearly 37 per cent lower than its highest point so far this year of 1.56409 per cent on Sept 8.

Short-term rates have been on a downtrend since last month when the US Federal Reserve again stayed its hand at raising rates for the first time in nearly a decade. They have fallen further since Oct 2 when a disappointing US non-farm payroll report pushed back expectations of a Fed funds rate liftoff. Dovish minutes of the Fed's September meeting released last week further solidified those expectations.

The three-month Singapore interbank offered rate (Sibor), used to set some mortgage rates, has also declined, albeit at a far more moderate pace. It fell to 1.13283 per cent yesterday from 1.13533 on Oct 2, down 0.6 per cent from its highest so far this year of 1.13958 on Sept 17.

DBS Bank economist Eugene Leow said: "The pullback in the Sibor and SOR came largely on the back of a reversal in emerging-market risk sentiment, which was in part triggered by stability in the yuan as well as weak US non-farm payroll numbers." As Asian currencies rose against the US dollar, there was positive spillover for the Singdollar, which has helped nudge down Sibor and SOR, he said.

For now, Fed hike expectations have been pushed into next year, leading to a waning of US dollar strength. These conditions should put downward pressure on the Singdollar and SOR, Mr Leow said.

But this is only a temporary situation. As the global economy stabilises, the market is likely to refocus on Fed hikes, he added.

ABN-Amro analyst Roy Teo expects the current recovery in Asian currencies against the greenback to be temporary. "Reduced fear of capital outflows from the region will allow more flexibility for Asian central banks to ease monetary policy to support their economies. This will reduce Asian currencies' carry attractiveness," he said.

Ms Selena Ling, head of Treasury research & strategy, OCBC Bank, attributed the SOR and Sibor declines "to the scaling back of long US dollar positions amidst the unwinding of Fed rate hike expectations for this year". She forecasts that the three-month Sibor and SOR could hit 1.35 per cent and 1.4 per cent respectively by year-end.

A version of this article appeared in the print edition of The Straits Times on October 13, 2015, with the headline 'No Fed rate lift-off: SOR plunges but Sibor dips just a bit'. Print Edition | Subscribe