Short-Term Interest Rate Spikes

Source : The Straits Times, Sep 30, 2008

Rise in Sibor leads to bigger loan repayments but higher interest for cash deposits for some

THE global credit crunch has started hitting home here with short-term interest spiking, spelling bad news for some home buyers but better news for those with cash in bank deposits.

Local banks are said to have tightened their credit to each other and to corporate clients, which has had the effect of making money harder to borrow.

The three-month Singapore Interbank Offered Rate (Sibor) has jumped in response, up by 100 basis points in just a month to 2 per cent.

Sibor is the rate at which banks lend cash to each other and so directly influences what consumers pay on loans like mortgages as many home loans are pegged to it.

Take a home buyer with a 20-year mortgage of $100,000 pegged to the three-month Sibor plus 1 per cent.

Sibor's sharp rise could mean a monthly instalment of $506 surging to $555, according to United Overseas Bank's (UOB) head of loans, Mr Kevin Lam.

The one-year Sibor rate has also been rising, though not as fast as its shorter variant. It moved from 1.75 per cent last month to about 1.875 per cent now.

'The majority of our customers have chosen the 12-month Sibor, where the rates are fixed for 12 months. Their monthly instalments will not be affected since the rates will only be refreshed every 12 months,' said a DBS spokesman.

Economists said short-term rates are elevated and rising, including those here, reflecting the 'dislocations' in global credit markets, as well as 'stresses amid the global shortage of US dollars'.

'With everyone still wondering and suspecting who is next, credit and interbank markets are freezing up,' said OCBC Bank economist Selena Ling.

While key central banks around the world have been injecting massive amounts of liquidity to break the impasse in the interbank markets, economists say this may not be enough.

Ms Ling said: 'While these massive liquidity injections have ensured that funding for overnight to one week is still available, albeit at somewhat elevated rates, term funding exceeding one month is still hard to come by.'

Higher interbank rates could also translate into higher lending rates for companies, and analysts say this could add to 'downside growth risks' for countries like Singapore already hurt by export slowdowns.

Long-term Sibor rates have not risen as quickly as short-term ones, perhaps because funding pressures are more immediate in the short term, said Citigroup economist Kit Wei Zheng.

On the flip side, the rising Sibor has meant higher deposit rates for some savers.

HSBC's rates for its multi-currency account, which are pegged to one-month interbank rates, has moved from 0.17 per cent a year as at Aug 29, to 1.17 per cent as at Sept 29 for amounts less than $25,000.

This gives a yield better than most saving deposit rates of 0.25 per cent, though HSBC's rates for its multi-currency account could head south if short-term interbank rates fall.

Mr Dennis Khoo, general manager of lending at Standard Chartered Bank, said there will be 'upside pressure' on Singapore dollar Sibor in the immediate future.

But Mr Khoo expects the three-month Sibor to decline early next year to just below 1 per cent and remain around that depressed level for most of next year.

'We believe a US government-led rescue plan for the banking sector should be finalised and announced soon,' he said.

Since short-term interbank rates are expected to fall, consumers could consider a mortgage pegged to the three-month Sibor rather than one linked to the one-year Sibor, suggested Mr Leong Sze Hian, president of the Society of Financial Service Professionals.

Mr Leong described the current situation - where short-term rates are higher than long-term rates - as an anomaly. It is the credit crunch, he said.

As a result, he would pick a shorter-term Sibor-linked package despite the higher instalments over a longer-term one as the three-month Sibor would trend lower.

The same reasoning applies to fixed deposits. 'If I'm putting money into a fixed deposit, I'll put it in a two-year fixed as I'm afraid short-term rates will go down,' he said.

Banks say that although the three-month Sibor has moved up significantly in the past week, Sibor-pegged home loans remain popular.

'They continue to be favoured over fixed rates and variable rates schemes as the applicable gross rate (Sibor plus a mark-up) is still relatively lower than the other two rate types,' said Mr Gregory Chan, OCBC's head of secured lending.


SIGN OF THE TIMES

'With everyone still wondering and suspecting who is next, credit and interbank markets are freezing up.'
OCBC Bank economist Selena Ling, on the 'dislocations' in global credit markets