SINGAPORE — While global interest rates have remained low, expectations of a United States Federal Reserve rate hike are mounting and a faster-than-expected policy normalisation could lead to capital flow and currency volatility, warned the Monetary Authority of Singapore (MAS) on Tuesday (Nov 29).

This could result in companies’ unhedged foreign currency-denominated debt coming under stress, with knock-on effects on banks, said the central bank in its annual Financial Stability Review. 

“A rise in US interest rates would exacerbate the US dollar funding shortage. Financial institutions reliant on US dollar funding could see an increase in US dollar funding costs and, if sufficiently acute, face a US dollar liquidity freeze,” it said. 

The Fed is widely expected to raise its key federal funds rate target by 25 basis points to between 0.5 and 0.75 per cent at its Dec 13-14 policy meeting. Early signs of capital outflows from Asia have been detected, said the MAS. Some Asian sovereign bond yields have risen and regional currencies have also fallen against the greenback, it noted.

Challenges remain in China, even while efforts to stabilise the economy have yielded results, said the MAS of Singapore’s largest trading partner. 

The MAS said the recent rise in debt levels may signal a build-up of banking system risk and given China’s growing links with the rest of Asia, disruptions to the Chinese economy could spill over to Singapore.

In its assessment of the global environment, the MAS highlighted the rising political risks and anti-globalisation forces in Europe following the United Kingdom’s vote in June this year to leave the European Union. It added that financial market volatility could spike in the run-up to elections next year in France and Germany as well as the Brexit negotiations. 

“Recent developments in G3 politics have highlighted wider concerns over the rise of anti-globalisation sentiment. Policymakers increasingly need to balance doing what makes the most economic sense against what is politically palatable, which may have long-lasting effects on global growth and downstream effects on the financial sector,” said the central bank, referring to the group comprising the US, Japan and the European Union.