SINGAPORE - A key benchmark local interest rate jumped on Wednesday to a level not seen since 2008.
The three-month Singapore interbank offered rate, or Sibor, which is the rate that banks lend to one another and use as a base rate in mortgages, rose to 0.87934 per cent on Wednesday, up 4 per cent from the previous day.
It has risen by 8.2 per cent since last Friday, when the United States announced it created 295,000 jobs last month, above consensus expectations for a rise of 240,000.
Growing strength in the US economy gives the Federal Reserve leeway to hike interest rates, which have been stuck at ultra-low record levels in a bid to spur growth.
The Sibor, in turn, is closely correlated to the US Fed funds rate, so any expectations of a hike there would move interest rates here higher.
-- SOURCE: BLOOMBERG
A weaker Singdollar against the greenback would also move Sibor higher as a higher interest rate is needed to compensate investors in Singdollar-denominated assets.
Historically, this has been the case for much of the Sibor's movements.
The Rise (2004 - 2006)
Sibor started moving up in 2004, rising to above 1 per cent, a leap from the trough of around 0.54 per cent in 2003.
It rose to a peak of 3.5625 per cent in the middle of 2006.
Rates in the US began rising in June as growth there picked up after the onset of recession in 2001 brought about by the dot.com bust and the September 11 attacks.
A stronger economy helps to boost confidence among consumers and businesses who are more willing to spend and borrow more, driving up interest rates as demand increases.
Central banks like the Fed also hiked interest rates to prevent inflation from soaring.
There were 17 Fed fund hike increases by the Fed from June 2004 to June 2006, hitting 5.25 per cent in June 2006.
Singapore's economy also expanded rapidly over this period, growing 9.2 per cent in 2004, 7.4 per cent in 2005 and 8.6 per cent in 2006.
The Fall (2007 - 2014)
2007 saw the start of Sibor's dramatic eight-year decline to near zero.
Sibor fell from a high of 3.5 per cent in 2007 to to below 2.75 per cent in the same year as a purring economy that grew 9 per cent that year saw huge amounts of cash sloshing about in the financial system.
The higher supply drove interest rates lower.
Elsewhere, worries that toxic sub-prime housing loans in the US could take a toll on banks weighed on markets and the economy.
The Fed reversed course and started cutting interest rate from August 2007 to 4.25 per cent by the end of the year.
It slashed rates another seven times in 2008 to 0.25 per cent by December after the Global Financial Crisis took hold with the collapse of investment bank Lehman Brothers in September.
Sibor fell below 1 per cent in 2008, though it shot up to 2.23 per cent in September that year as credit markets globally froze with lenders unwilling to issue loans, demanding higher interest rate for the risk.
The Fed then injected capital markets with unprecedented liquidity through its quantitative easing (QE) programme to make loans cheaper and revive its moribund economy.
It also pledged to keep interest rates at record lows until the economy recovers.
This drove effective interest rates in the US close to zero while the Sibor fell to a record low of 0.25 per cent in September 2011.
The swap offer rate, or SOR, which is commonly used in commercial loans, even dropped into negative territory for the first time in history to a low of -0.6987 in August 2011.
A negative rate implies savers pay the bank to keep their money while borrowers are paid to take out loans as investors stuck with cash look for safe havens like Singapore to park their money.
The Rise Again (2015)
Sibor started creeping up towards the end of 2014, staying near 0.4 per cent.
It made a sudden upturn in January this year, breaking past 0.5 per cent and gaining strength steadily since to be just shy of the 0.9 per cent mark.
Speculation that the first US rate hike in almost a decade could take place sooner - perhaps as early as June instead of nearer the end of the year - and a stronger greenback drove up interest rates here.
The US dollar traded at 1.3876 against the Singdollar late on Wednesday, a lofty level not seen since July 2010.
Economists here have forecast that Sibor could hit 1 per cent by the end of the year.