Jitters ahead of the outcome of a key United States Federal Reserve meeting spurred a 5.6 per cent jump in a benchmark Singapore interest rate. The three-month Singapore Interbank Offered Rate (Sibor) - used to price home loans and other consumer lending - surged to 0.87234 per cent yesterday.
On Tuesday, the rate stood at 0.82596 per cent. It has fallen almost 15 per cent from its highest point this year of 1.02705 per cent on April 9.
But it is still nearly double its level at the start of the year.
"The market remains wary in the lead-up to eventual Fed hikes. Through the course of the year, three-month London Interbank Offered Rate (Libor) has been grinding steadily higher, albeit at a very low pace. Once the Fed hikes get under way, the pace of increase in three-month Libor is likely to speed up. Under these conditions, upward pressure on short-term Sibor and SOR (Swap Offer Rate) rates is inevitable," DBS economist Eugene Leow said. The Singapore-dollar Sibor is correlated with the US-dollar Libor, a benchmark rate used around the globe by banks lending money to one another.
Another local interest rate, the three-month SOR - typically used to price corporate loans - spiked 6.1 per cent overnight to 0.98362 per cent. It is up more than 31 per cent from Jan 2 but is down 13 per cent from a year-high of 1.13207 per cent on March 24.
A recent rally in the greenback, which hit a year-high of $1.39 on March 18, helped propel both the Sibor and SOR to their respective peaks this year. But in currency markets yesterday, investors deemed it safer to not be short on the US dollar ahead of the Federal Open Market Committee policy statement. The greenback is mostly unchanged at $1.3657 from Tuesday.
Ahead of the outcome of the Fed's two-day policy meeting, markets were divided on whether it will take a hawkish or dovish stance. Some players suspect the Fed might choose to do neither.
Goldman Sachs this week said some believed economic uncertainty in China could cause the Fed to delay tightening until next year.
In recent congressional testimony, Fed chair Janet Yellen neither ruled out a September hike nor guided the market towards thinking it was a done deal.
"We think the upcoming FOMC statement will reflect this non-committal approach," Mr Tom Porcelli, chief US economist at RBC Capital Markets, told Reuters.
At most, the Fed might sound a little more positive on the economy and describe risks to the outlook as balanced rather than "nearly" balanced, he added.