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Explainer: Will the US Federal Reserve interest rate cut mean cheaper loans in Singapore?

SINGAPORE — For the first time since the depths of the global financial crisis more than a decade ago, the United States central bank has lowered borrowing costs.

A cut in the benchmark interest rate in the world's largest economy will have ripple effects around the globe but Singapore borrowers may not necessarily see cheaper loans, experts say.

A cut in the benchmark interest rate in the world's largest economy will have ripple effects around the globe but Singapore borrowers may not necessarily see cheaper loans, experts say.

SINGAPORE — For the first time since the depths of the global financial crisis more than a decade ago, the United States central bank has lowered borrowing costs.

Could this mean cheaper home loans and other loans for Singaporeans? It is not that straightforward, but perhaps not. TODAY explains the layers between a US Federal Reserve interest rate cut and possible savings to the pockets of people here.

WHAT IS THE NEWS?

As widely expected, the Fed voted on Wednesday (July 31) to reduce its benchmark interest rate by 0.25 percentage points to a target range of 2 per cent to 2.25 per cent. This is effectively the short-term wholesale interest rate. Banks add their margin on top when lending to customers.

The Fed, which had been lifting rates since late 2015, cited a global slowdown and trade tensions between the US and China as factors in its decision. Central banks generally cut interest rates to encourage more people to borrow money to buy houses or build new factories, for instance, and thereby give the economy a boost.

DOES IT MATTER FOR SINGAPORE?

Unlike in many countries, Singapore’s central bank plays no direct role in setting interest rates. That means the global marketplace for money plays a key role — and the Fed rate is important.

One widely used interest rate here, to which home loan interest rates are often pegged, is the Singapore Interbank Offered Rate (Sibor), and that can be influenced by Fed hikes or cuts. Mortgage payments for homeowners here with Sibor-pegged rates go up if the Sibor goes up and vice versa. Broadly speaking, the Sibor rises or falls according to the global money market.

The Fed is a major central bank and other central banks around the world, especially in emerging markets, usually take their cue from its moves. Sibor, in turn, can be affected by all these moves, OCBC Bank’s chief economist Selena Ling told TODAY.

CHINA INCREASINGLY IMPORTANT NOW

Nevertheless, the correlation between US and Singapore interest rates was “stronger in the past”, stressed Ms Ling, noting that the Republic’s economic dependence on China, for instance, has grown.

Instead of setting interest rates, Singapore’s central bank effects monetary policy by managing the Singapore dollar against the currencies of its trading partners within a policy “band”. Twice a year, the Monetary Authority of Singapore (MAS) reviews its policy stance on the Singdollar.

Before the Fed move, some economists had raised bets that the MAS would “ease” monetary policy at its next meeting in October — that is, adjust its policy stance so that the trend of the value of the Singdollar would generally be to weaken.

Economists have noted, for example, that non-oil domestic exports — the most common measure of shipments — declined the most in more than three years in May due to a slump in exports to China. And data last month showed Singapore's economy expanded a disappointing 0.1 per cent in the second quarter.

According to Ms Ling, the expectations of an MAS easing move may “ironically imply that domestic interest rates may rise or have less downside room from here relative to US interest rates”.

BANKS QUICK TO LIFT RATES, SLOWER TO CUT THEM

Even if the latest Fed rate cut does play a contributing role in affecting rates here, could homebuyers, who may have deferred purchases as interest rates rose somewhat in recent times, be set to enjoy low interest rates again any time soon?

Economist Sumit Agarwal, a Low Tuck Kwong Distinguished Professor of Finance, Economics and Real Estate at NUS Business School, said the effects of a rate hike are more likely to trickle down to a consumer, rather than those of a rate cut.

“Typically, most of these rates are very sticky. So when rates go down, banks don’t adjust them fast enough,” said Prof Agarwal. “When rates go up, banks adjust them fast enough, because they are losing money on their consumers, so they will adjust their lending rates.”

With this, Prof Agarwal does not foresee “any measurable impact” of this latest Fed adjustment on consumers here, not even for Singapore corporations small or large.

MORE FED RATE CUTS COULD LEAD TO CUTS HERE

Wednesday’s Fed cut was its first since it slashed rates to near zero in 2008.

But unlike those cuts, which were intended to rescue a failing economy, this one is touted as an “insurance cut” — one made to keep growth in the US economy chugging along as a precaution to protect the US from slowing growth in China and Europe and uncertainty over US President Donald Trump’s trade war with China.

This rate cut came even as economic expansion in the US is strong, unemployment is hovering at historic lows, and consumers are still spending.

For the US Fed rates to truly impact Singapore, it is better to look for sustained trends. In other words, if the Fed cut its rate again — which it hinted it might — that would be more meaningful.

After all, financial institutions do not usually react to day-to-day market gyrations in adjusting deposit or mortgage rates.

Wednesday’s reduction is “not that much” to begin with, Prof Agarwal pointed out.

Related topics

Fed rate cut interest rate loans Federal Reserve System bank

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