Singapore Interest Rate Outlook for 2016 and Beyond

by Aktive Learning on January 26, 2016

By Paul Ho (guest contributor)

In Singapore, the Sibor (Singapore Interbank Offer Rate) seems to be highly correlated to the US Federal Reserve Target Funds Rate. Hence, we tend to watch the US Federal Reserve to get clues on where mortgage interest rates in Singapore are heading.

In August 2015, we forecasted that “at a rate of a ~0.1% drop per month, by November the unemployment rate should fall below 5% and the Fed may be tempted to raise the Fed Funds target rate by 0.25% to 0.5% as a precautionary measure.”

In December 2015, the US unemployment rate dropped to 5% and the Federal Reserve raised the Federal Reserve overnight funds rate from 0.25% to 0.5%.

Chart 1: US Unemployment rate versus US Disposable personal income per capita (Trading Economics, US Bureau of Labor Statistics,

The unemployment rate which is at 5% in Dec 2015 looks to be on a downward trend while disposable incomes are rising. Economic and political pressures are building up for wage growth in 2016. 13 US states are raising minimum wages (Source: CNBC).

Chart 2: Percentage change in wages, 2014 – Nov 2015. Bureau of Labor Statistics

The US Federal Reserve will watch keenly whether the economy is over-heating and causing inflation, and if so will raise interest rates to cool it down.

Labor tightness contributes to inflation, while import price drops is disinflationary. However, personal consumption is 68.83% of the GDP as at November 2015, hence rising disposable incomes would likely lead to inflation, while oil price may recover in 2016, increasing inflationary pressures.

Chart 3: US Import Prices, Jan 2014 to Jan 2015, Bureau of Labor Statistics

The rest of the world is largely in a deflationary environment and this has caused US import prices to dip, further aided by the strengthening US dollar. Oil import priceshave dropped, playing a larger part in the drop of aggregate US import prices, leading to low inflation in the US in 2015.

Interest Rates in Major Economies

Is the world headed for recession? We can look at the respective regions’ interest rates as an indicator.

Chart 4: Interest Rates in the 4 Major Economies Dec 2015, TradingEconomics

Euro Area interest rate is flat at 0.05%, the lowest ever. China’s 1-year benchmark lending rate broke a new low at 4.35% and Japan’s interest rate is 0%. This indicates weakness in the economic outlook in Europe, China and Japan. In the case of the Euro Area and Japan, interest rates cannot drop anymore, hence monetary easing is implemented to try to create inflation.

Euro Area, China, Japan and United States make up about 65% of the world’s economy at about USD18 Trillion, 10 Trillion, 4.6 Trillion and 17 Trillion respectively. The United Stateslooks to be recovering while the rest of the world struggles with slowing economic growth.

Impact of Singapore’s Open Economy and Price Stability

Singapore is an open economy where trade is more than 250% of its GDP.

Chart 5: Selected countries Trade as a Percentage of GDP, Worldbank,

With such huge imports and exports, this means that domestic policies, money supply and interest rates have a lesser impact on inflation than the exchange rate.

A stronger Singapore dollar will lead to cheaper imports and lower inflation but costlier exports, while a weaker Singapore dollar will lead to higher inflation (due to higher import prices) but potentially higher exports.

However, higher interest rates do not severely impact the manufacturing sector as Singapore’s manufacturing sector consists of larger companies which can largely self-fund their expansion or transfer funds from their headquarters. Interest rates affect property developers more.

MAS has observed that the USD Sibor (3m) and SDG Sibor (3m) track each other closely, hence the highcorrelationbetween US economy and that of Singapore. Moreover, due to Singapore’s role as an international financial centre with an open economy, “small changes in the difference between domestic and foreign interest rates can lead to large and quick movements of capital.” (Source MAS). A negative capital account indicates capital outflow and is generally undesired, unless the outflow is due to investments overseas.

MAS Monetary Policy stance – Gradual Appreciation of S$NEER policy band

For Singapore, monetary policy means exchange rate policy. In the past, MAS has adopted a “Gradual Appreciation of the S$NEER (Singapore Dollar Nominal Effective Exchange Rate) policy band”. Singapore’s weak economic growth meant that MAS has to change its policy stance to “Gradual Appreciation of the S$NEER policy band. However, the rate of appreciation will be reduced slightly.”

This simply means we will still continue to maintain a strong currency, but will reduce the rate at which the Singapore Dollar becomes stronger.

Because of Singapore’s open economy, small change in US interest rates as well as that of Singapore’s major trading partners “can lead to large and quick movements of capital.” Hence the US Federal Reserve interest rates hikes will lead to Singapore interest rates rising in tandem.

Singapore’s use of the S$NEER means that Singapore will weigh its currency appreciation against the trade-weighted basket of currencies. This likely means a slight depreciation against the USD and HKD and slight appreciation against its major trading partners, given their current economic weaknesses.

When there is weakness in the economy, a country cannot artificially maintain a strong currency stance unless it has huge foreign reserves to defend itsstance, or it may open up arbitrage opportunities to currency speculators such as George Soros. Hence Singapore’s adjustment of its policy stance is the right policy as it removes any potential mispricing.

The day SOR went negative

On 17 Aug 2011, the Swap Offer Rate (SOR) went negative. This was to stop the flood of US dollars coming into Singapore dollar due to the Singapore dollar appreciating against the US dollar. Funds are willing to bear with negative interest rates in view of an appreciating currency.

Chart 6: Sibor Interest Rates, ABS,

When a currency depreciates, the opposite happens. Interest rates will rise to mitigate the outflow of funds.

Summary and mortgage interest rate forecast for 2016 to 2018

The Federal Open Market Committee (FOMC) forecasted the median fed funds overnight target rates for 2016 at approximately 1.5%, for 2017 at approximately 2.75%, and for 2018 at around 3.5%, with a longer run interest rate from 3.25% to 3.5%. If these forecasts were to hold true, these will similarly exert upward pressure on Singapore dollar Sibor overnight rates.

A typical US economic recovery runs for several years while Singapore is just entering a weakening economic cycle which could last two to three years. Singapore’s largest trading partner China is also entering a slower growth phase while its second largest trading partner Malaysia is also slowing down.

Chart 7: Federal Open Market Committee (FOMC) participants’ forecast

An overall slight and gradual appreciation of the S$NEER policy band, means that the Singapore dollar will have to find the trade-weighted “middle ground” – which is slightly on the “appreciation” side. Given that the US is recovering and the rest of the world is largely slowing down, this means that the Singapore dollar will slightly appreciate against many currencies while slightly depreciating against the US dollar.

It is hard to predict the future, but based on the current data, forecasts:

  • 2016: Sibor (1m) to be in the range of 1.4% to 2%
  • 2017: Sibor (1m) to be in the range of 1.9% to 2.5%
  • 2018: Sibor (1m) to be in the range of 2.4% to 3%
  • 2019 and beyond: Sibor (1m) to be in the range of 2.4% to 3%

By Paul Ho, holder of an MBA from a reputable university and editor of, Singapore’s first Cloud-based Home Loan reporting platform used by Property agents, financial advisors as well as Mortgage brokers. Posted courtesy of, a Singapore property blog dedicated to helping you understand the real estate market and make better decisions. Click here to get your free Property Beginner’s and Buyer’s Guide.

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