Interest rates fall to five-year low

Business Times - 12 Nov 2008

3-month Sibor plunges to 0.89%; borrowers may gain, savers may be hit
By SIOW LI SEN

(SINGAPORE) Interest rates have plunged to near five-year lows as loan demand falls off a cliff even as governments inject liquidity to get credit flowing again.

Yesterday, the key three-month Sibor or Singapore interbank bank offered rate fell to 0.89 per cent, not far from the all-time low of 0.69 per cent on Nov 21, 2003. The benchmark rate, to which many home loans are pegged, is now 60 per cent lower from less than two months ago when it hit 2.23 per cent on Sept 26.

While this may be good for borrowers, savers may find themselves earning no interest - similar to the situation in Hong Kong where banks pay nothing for savings accounts.

HSBC Hong Kong pays zero interest for amounts less than HK$5,000 (S$969) while amounts higher than that earn 0.01 per cent. DBS Bank Hong Kong too pays a miserly 0.01 per cent for savings accounts regardless of amounts. Even its high-end Treasures customers get only 0.15 per cent, regardless of their balance.

The rapid fall in interest rates has caught many by surprise. 'We are in unprecedented times,' said Alvin Liew, Standard Chartered Bank Singapore economist.

Mr Liew said that Singapore's interest rates are influenced by US interest rates and domestic demand.

'In recent years, domestic interest rates moved more or less in line with the US$ Libor or interbank rate, but at a discount, as Singapore has in recent years had a forex appreciation stance,' he said.

'With Singapore now having moved to a neutral policy, one of the key implications would be that currency appreciation is taken out of the equation, and we are likely to see SGD Sibor tracking US$ Libor much closer.'

The US Federal Reserve recently cut the Fed Fund Target Rate (FFTR) by another 50 basis points to one per cent (on Oct 29) and many expect another 50 bps snip before end-2008 to bring FFTR to a record low of 0.5 per cent and held at this level for the whole of 2009.

But the three-month Sibor is still lower than the FFTR and one of the factors could be that Singapore is regarded as a safe haven in a more volatile region, said Mr Liew.

Selena Ling, OCBC Bank economist, said that, over the years, the three-month Sibor has traded at a wide discount to the US rate, though a very rough guide would be one per cent discount to the FFTR.

'But if the Fed cuts to 50 basis points, we can't go to negative, right?' Ms Ling said. She noted, however, that overnight Sibor rates recently have gone very near to zero.

'It's highly unlikely we'll go to zero, but never say never,' she said, referring to the three-month Sibor.

'The current circumstances are quite abnormal because all the central banks are injecting liquidity, and you can't second guess them,' she added.

Some feel interest rates will continue to face downside pressure as demand for loans will contract next year given that Singapore is already in a recession.

So what can borrowers and savers expect?

Dennis Khoo, general manager of lending at Standard Chartered Bank was non-committal.

'If customers feel that rates will go lower, then the three-month Sibor is a good way to capitalise, given that it automatically adjusts as the rates go lower. Should customers feel that rates will eventually move higher, then Standard Chartered Bank offers them an attractive mortgage pricing package with a two-year lock-in period of 2.49 per cent.'

He added: 'As interest rates drop, the savings rates will move in tandem.'