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Explainer: As the US Fed flags more aggressive interest rate hikes, could S'pore mortgage rates hit 20-year highs?

SINGAPORE — Investors and financial markets were spooked overnight when the United States Federal Reserve (US Fed) not only aggressively hiked interest rates again, but flagged more hikes this year and even next, a prospect that economists in Singapore said could drive mortgage rates here to levels not seen in about 20 years.

The United States Federal Reserve Board's chairman Jerome Powell speaking during a news conference in Washington, DC, on Sept 21, 2022.

The United States Federal Reserve Board's chairman Jerome Powell speaking during a news conference in Washington, DC, on Sept 21, 2022.

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  • Investors and financial markets were spooked overnight when the US Fed raised interest rates by 75 basis points to a 14-year high
  • The central bank’s projections indicate more interest rate hikes to come this year and possibly into next year
  • Economists told TODAY that past rounds of interest rate hikes by the US Fed have been largely ineffective in curbing inflation as they were implemented too late
  • In Singapore, economists said mortgage prices are expected to rise, possibly touching a two-decade high of 5 per cent
  • They also warned of an increased likelihood of Singapore entering a technical recession later this year

SINGAPORE — Investors and financial markets were spooked overnight when the United States Federal Reserve (US Fed) not only aggressively hiked interest rates again, but flagged more hikes this year and even next, a prospect that economists in Singapore said could drive mortgage rates here to levels not seen in about 20 years.

On Wednesday (Sept 21), the US central bank raised its benchmark rate by a hefty 75 basis points, or 0.75 percentage points, to a new target range of 3 per cent to 3.25 per cent. It was the third outsized rate hike in a row, and comes after years of historically rock bottom borrowing costs.

The move, intended to curb soaring inflation by increasing the cost of money and thus cooling the economy, brings the US Fed’s benchmark rate to its highest level since the 2008 global financial crisis.

The US Fed has flagged further rate rises into next year and has revised its median official forecast for interest rates to rise to 4.4 per cent by the end of this year, and go as high as 4.6 per cent in 2023, above its earlier projections.

Countries around the globe, including Singapore, have been facing rising levels of inflation, fuelled by factors such as an energy crisis caused by the war in Ukraine, supply chain problems caused by the Covid-19 pandemic and tight labour markets.

Many other central banks are raising interest rates, too. For example, the Bank of England raised its benchmark rate half a percentage point on Thursday.

Economists told TODAY on Thursday that they expect mortgage rates here to rise with the latest round of hikes. Singapore could also slide into a technical recession, they said.

TODAY explains the latest round of interest rate hikes by the US Fed and what this means for Singaporeans.

WHY THE LATEST ROUND OF HIKES?

The latest hike by the US Fed is the fifth consecutive rise in this cycle after the previous efforts did little to quell US inflation, which hit 8.3 per cent last month, down from its 40-year highs of above 9 per cent, but still well above the US Fed’s target of around 2 per cent.

The last time the US central bank announced a hike of similar magnitude was in July this year. Central banks often move interest rates by only a quarter of a percentage point or occasionally half a point.

Ms Selena Ling, the chief economist at OCBC bank, said that past rounds of rate hikes have been ineffective in bringing down inflation due to a combination of factors.

These include spiralling energy prices rising due to the Russia-Ukraine war, wage growth due to the tight labour market, rental inflation and resilient private consumption.

Moreover, the US Fed was “late to the game” in introducing the last few rounds of rate hikes, she said.

A policy known as the average inflation targeting framework, introduced by the US Fed in 2020, allowed inflation to run above the US Fed’s goal of 2 per cent for some time to support the labour market and economy.

However, introducing it turned out to be a “huge mistake” because “inflation ran away and never came back”, Ms Ling said.

“So the US Fed had to make up for lost time, which is why we see them hike 75 basis points in quick order back-to-back.” 

So the US Fed had to make up for lost time, which is why we see them hike 75 basis points in quick order back-to-back.
OCBC bank's chief economist Selena Ling
Dr Chua Hak Bin, who is the regional co-head of macro research at Maybank, said that inflation has also been boosted by a tight labour market in the US, which has driven up wage costs.

HOW WILL THE LATEST HIKE AFFECT GLOBAL MARKETS?

Economists said that with the latest hike, the US dollar is expected to strengthen and lead to higher interest rates globally given that its interest rates are closely tracked by other economies.

Mr Eugene Leow, an economist at DBS bank, said that the aggressive Fed hikes increase the odds of a recession in the US and pointed to a possibility of a “moderate downturn” next year.

Ms Ling of OCBC said that she expected the markets to be spooked by the latest round of aggressive hikes and the possibility of upcoming ones.  

While the markets had expected the US Fed to cut interest rates by the middle of next year if growth falls, the Fed has been more hawkish than expected, signalling instead that it will introduce more hikes in time to come, she added.

Dr Chua said that other central banks, such as those in Australia and Europe, which are facing similar inflationary pressures to the US, could also follow suit with similar additional rate hikes.

HOW WILL THE MOVE AFFECT SINGAPOREANS?

In Singapore, aggressive rate hikes by the Fed could drive mortgage rates up to 5 per cent by mid-2023, a figure the country has not seen in about 20 years, Dr Chua said.

“This means that Singaporeans will be subject to a larger instalment of housing payments and that could bite because it could take away what is available for other forms of spending.” 

This means that Singaporeans will be subject to a larger instalment of housing payments and that could bite because it could take away what is available for other forms of spending.
Dr Chua Hak Bin, regional co-head of macro research at Maybank

Dr Chua added that Singaporeans should also consider property purchases carefully because interest rates may not fall to their recent levels of near 1 per cent even in three years’ time.

Unlike the US Fed, Singapore's central bank does not set interest rates. Rather, many mortgage rates here are pegged to benchmark rates, which in turn are closely correlated with global interest rates, especially those in the US.

In a CNA article in June this year, it was reported that two-year and three-year mortgage loans that carry a fixed rate have seen median rates go up from about 1.5 per cent at the start of the year to more than 2.6 per cent.

Ms Ling also warned that the risk of Singapore going into a technical recession — when the economy contracts in quarter-on-quarter terms for two successive quarters — is “creeping higher”.

This is because a US recession could have knock-on effects on areas such as business and consumer confidence, consequently affecting Singapore’s trade and growth prospects, she explained.

Singapore’s economy contracted by 0.2 per cent between the first and second quarter of this year.

However, the country is unlikely to experience a regular recession, as its full-year growth is likely to be positive, she added.

Related topics

inflation interest rates US Federal Reserve mortgage housing loans property economy recession

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