US Federal Reserve rate hike puts strain on borrowers in Singapore

SINGAPORE — Home buyers here will have to cough up more to pay for their mortgages while companies will find it more difficult to service their debt, analysts said on Thursday (Dec 15), after the US Federal Reserve raised its benchmark rate and hinted at a faster pace of rate hikes next year.

On Thursday, the three-month Singapore Interbank Offered Rate (SIBOR) – against which most residential property loans are pegged to - rose to 0.963 per cent from 0.932 per cent a day earlier. The increase follows the Fed’s widely expected decision overnight to hike its key federal funds rate target by a quarter of a percentage point to between 0.5 and 0.75 per cent. What was unexpected was the Fed’s projection of three rate hikes next year, up from two previously, and another three hikes in 2018.

The three-month SIBOR kicked off this year at around 1.2 per cent and hovered around 1 per cent from April to June before falling to its current levels around 0.9 per cent. Experts expect the indicator to pick up to close to 2 per cent by the end of next year, which in turn would put a strain on bor-rowers.

“The Fed sounds like the US economy may be looking at higher rates, that’s what we have to watch out for, even though the interest rates are still low compared to historical levels,” said CIMB Private Banking economist Song Seng Wun.

“The bottom line is that borrowers here in Singapore have to be prepared for the upcoming possible hikes as these would now be priced in by banks at higher levels. Borrowers have to be pre-pared to pay up to 1 percentage point higher than what they are paying now, up to just under 2 per cent, by the end of the year, if the US interest rates forecast is a guide,” he said.

Credit Suisse economist Michael Wan said: “We are looking to see rising interest rates...Our official forecast for the three-month SIBOR is at 1.75 per cent for next year. The interest rate increase should crimp private consumption in 2017, while for the property market, it could be a mixed bag as the number of unsold units have been coming down and providing a bit of a support.”

Ratings agency Moody’s Investors Services said: “The rate hike confirms that the US economy is performing well. We continue to expect US gross domestic product growth of around 2.2 per cent in 2017 and 2.1 per cent in 2018.”

While the Fed gave its vote of confidence for the US economy that is strong enough to support the rate hike, Mr Wan said he has “yet to see any spillover benefits” from the world’s largest economy that will help lift Singapore out of the doldrums.

Earlier this week, in the latest quarterly survey by the Monetary Authority of Singapore, private sector economists slashed their annual growth forecast for the Republic this year to 1.4 per cent from 1.8 per cent previously, citing a weaker global trade outlook and a soft performance from the fi-nance and insurance as well as wholesale and retail trade sectors. For next year, the economists cut their forecast from 1.8 per cent to 1.5 per cent.