INTEREST rates here are likely to be higher by Christmas in the light of the anticipated move by the United States Federal Reserve.
Market watchers told The Straits Times yesterday they expect the Fed will make an initial hike in September, something long predicted by financial analysts. That in turn will likely propel the three-month Singapore Interbank Offered Rate (Sibor) to at least 1 per cent by the end of the year.
Three-month Sibor - which governs many home loans - is at 0.82146 per cent now following a drop from 1.02 per cent in early April.
That pullback was due mostly to the decision by Monetary Authority of Singapore (MAS) to maintain its exchange rate policy, but a move by the US Fed will kick-start its rise again, Credit Suisse economist Michael Wan said.
"We still see a strong underlying momentum for US growth, and our expectation is that the Fed will start raising rates in September, pushing them up 50 basis points by the end of this year, followed by another 120 basis point increase in 2016.
"Driven by this picture, three-month Sibor will gradually rise to 1 per cent by the end of this year and to about 2 per cent by the end of next year."
Mr Wan's comments come after the Fed concluded in its June meeting last week that the near-zero rates should be maintained for now to support growth.
But Fed chair Janet Yellen stressed that economic recovery is making progress and market watchers still widely expect a September hike.
CMC Markets analyst Nicholas Teo agreed that there is upside pressure on Sibor against this backdrop. "We are on the cusp of normalisation. Dr Yellen has promised that rate hikes will be gradual, but it is still a reversal from the easy money that had flooded the market and kept interest rates at abnormally low levels in the past six years or so.
"At this point of inflection, Sibor has nowhere but up to go. I won't be surprised at all if three-month Sibor settles above 1 per cent by the end of this year, as we see recovery in the US pick up steam towards the end of the year," he said.
ANZ senior rates strategist Kumar Rachapudi also sees a similar trend over the next six months.
"Six-month Sibor is stabilising at around 0.9 per cent given the change in market expectations on the pace of Fed hikes, as well as given how US dollar and Singapore dollar are trading," noted Mr Rachapudi.
"We think that the rate will be range-bound around 1 per cent in the near term but the upward trend will continue. Local borrowers should take advantage of the current rates to hedge their interest rate risks."
But Mr Wan warns of the downside to the Sibor outlook: "As local rates rise, people will cut back on discretionary spending and I expect Singapore retail sales to moderate moving forward."