Singapore Home Loan: TO SIBOR or NOT to SIBOR?

20 Year SIBOR CHART – Adapted from MAS database by www.PropertyBUYER.com.sg

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To Sibor or Not to Sibor?

From the 20 year SIBOR Chart, between 1988 and Aug 2008, Interbank rates have ever almost reached 9%. Even markets with much deeper liquidity have dried up in funds from time to time, leading to sky high interest rates in excess of 20%.

During "recession" years of 2002 and 2005, interest rates hovered around 1%. However the interbank rates have risen to 3+% from 2006 to 2007 only starting to fall dramatically back to around 1% in 2nd half of 2008.

The Differences between this time in 2008 and 2002 to 2005 however are: -

• During 2002 to 2005, inflation is low, while in 2008, inflation is still high (~5-6%).

• This time however, Inflation rate is higher than interest rate. This is not very common. This could indicate intervention. 

The Singapore government manages the exchange rate against a trade weighted basket of currencies of it’s trading partners to control inflation. Interest rates are typically set lower than that of the United States or European Union. The Singapore interbank rates are set  between banks within the Association of Banks in Singapore. The Singapore Government is not known to actively manage the interest rates, however it is believed that MAS does, from time to time intervene in the market to ensure liquidity and smooth operation.

The situation of interest rates lower than inflation rate could be caused by: -

• Intervention of the Singapore Government (Likely)

• Collective action by the banks by putting liquidity into the market (Unlikely)

If it is indeed true that the Singapore government has a desire to keep interest rates low, despite inflation being high, this could indicate that the government no longer sees inflation as a risk and instead sees a serious recession on the horizon. And hence the government has moved speedily to facilitate a soft landing instead of a crash.

Nobody really knows as MAS never state categorically what their stance is. So where the rates will end up is still anybody’s guess. But since Singapore is not fully isolated from what is happening elsewhere in the world, despite Singapore’s huge reserves and fiscal flexibility, the Singapore economy is bound to slow down.

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