Taking stock of interest rates

Published December 14, 2011


As demand for funds continues to outpace deposits, spreads - including mortgage spreads - may rise, reports TEH HOOI LING


WHILE Singapore interest rates are generally expected to remain low next year, there might be a chance that mortgage rates will rise as banks begin to charge higher spreads should demand for funds continue to outpace deposits, economists Executive Money surveyed said.


Rising mortgage rates, if that comes to pass, will be yet another piece of bad news to hit property owners and investors in Singapore following a slew of tightening measures introduced by the government this year.

Most of the forecasts for the three- month Singapore Interbank Offered Rate, or 3M Sibor, ranged from 0.38 per cent to 0.5 per cent.

Barclays puts the probability of Sibor falling below 0.5 per cent next year at 75 per cent. 'With Europe now likely to embark on quantitative easing on a larger scale to fight recession, we expect that could accentuate the liquidity excesses around the world,' said its economist Leong Wai Ho. 'Flush liquidity conditions worldwide, coupled with the perception of Singapore as a safe haven, could put pressure on money market rates here to move even lower.'

While the base case scenario of most economists is that short-term rates would stay low, there are possible events that could trigger interest rates to spike.


OCBC's Selena Ling said: 'Our base case scenario is that short-term interest rates will probably be fairly well-anchored, with the 3M Sibor likely to stick to a 10 to 15 basis point range from the current 0.39 per cent fixing. Our end-2012 forecast for 3M Sibor is 0.49 per cent. We put 50 per cent probability on this scenario.'

This is predicated on the following:

No double-dip recession for the US, but a sub-par growth with a stagnant labour market. The FOMC (Federal Open Market Committee) sticks to its very low rates for an extended period of time, at least until mid-2013;

Meanwhile, Europe continues to 'muddle through' with no disorderly default by any of the financially weaker countries, and policymakers bite the bullet and adopt the necessary policy measures and economic reforms;

China decelerates but there's no hard landing (defined as GDP growth falling to below 7 per cent) and it manages its policy risks well. The risks are well-known - property markets, the informal banking sector (for example, Wenzhou) and local government financing vehicles.

'Essentially no policy mistakes,' said Ms Ling, 'else the downside caveat is risk of global recession or financial crisis.'

She reckons there is at least a 25 per cent probability attached to two tail risks which could cause funding costs to spike. One, the worst-case scenario materialises in the eurozone, and we get a Lehman-type event. Two, the Monetary Authority of Singapore (MAS) eases monetary policy again in April 2012 in an environment where global risk-off sentiment dominates.

This could cause some capital outflows that could temporarily impact domestic liquidity and drive short- term Singapore dollar rates higher, she said.

The possible easing of the MAS policy, via a shift to neutral (i.e. zero per cent appreciation) stance, was also flagged by Citi and UOB.

Citi's economist Kit Wei Zheng said 3M Sibor could rise to the 0.6 to 0.7 per cent range, depending on how MAS policy and USD Sibor rates evolve.

UOB's Chow Penn Nee noted that swap offer rates - which are more sensitive to market movements - may move up if the MAS shifts its monetary policy stance to neutral from the current gradual appreciation stance.

The probability of MAS shifting to a neutral stance is growing, she said, given the much slower domestic growth outlook for 2012 - 2.5 per cent based on UOB's projection - and continuing uncertainties and weakness in the external economy. Also, inflation is moderating.

But even if short-term rates stay low, mortgage rates could increase gradually by 0.5 to 1 per cent over the next two to three years, said Bank of America Merrill Lynch's economist Chua Hak Bin.

'We expect the banks to charge higher spreads (including mortgage spreads) as the loan-to-deposit ratio has climbed to a five-year high of 86 per cent. The ratio was 68 per cent in April 2007. The bargaining position of banks increases as the loan-to-deposit ratio rises,' he said.

While loan growth going forward will probably cool, given the slowing economy and strict property measures in Singapore, growth in demand for loans may continue to exceed deposit growth for quite some time, Mr Chua said.

MAS reported that domestic banking non-bank loans grew 31.1 per cent year on year in the third quarter of this year. This compares with deposit growth of just 12 per cent.

'China's monetary tightening and European banks' deleveraging have introduced opportunities and gaps for Singapore banks to step in,' said Mr Chua.

While rising interest rates are a possibility, OCBC Bank's Ms Ling reckons that 'the bigger headwind for property investors could be the recent slew of property curbs which have cooled market sentiment'.

In a report yesterday on the impact of additional stamp duties on property purchases in Singapore, DMG & Partners' chief regional strategist Craig Irvine said: 'We are clearly reminded of cooling measures applied in early 1996. After that policy intervention, residential prices in Singapore fell by over 40 per cent over the next three years.

'Then, as now, the government had acted strongly to dampen speculative activity after a particularly 'frothy' period. This time, the measures primarily (and rightly, in our view) target foreign liquidity, which has become a key driver of incremental demand.

'We think the impact will go beyond the foreign money to overall sentiment.'