Benchmark interest rate at lowest since end-2005

SINGAPORE'S benchmark interest rate has dipped sharply since the global stock-market upheaval last week, hitting its lowest level since December 2005.

The three-month Singapore interbank offered rate (Sibor) fell to a 15-month low of 3.1875 per cent yesterday - down about 5 per cent this month.

Sibor is the interest rate at which banks lend excess savings to one another. It influences the rates that consumers pay on loans such as mortgages.

However, mortgage borrowers who have seen their interest payments rise in the last two years may have to wait some time before their loan rates drop.

This is because there is usually a lag between Sibor and consumer loan rate movements.

Secondly, Sibor is not expected to plunge much further, predicted economists. Despite the sudden drop from around 3.37 per cent at the end of last month, the Sibor is still a long way off the rock-bottom levels of less than 1 per cent in 2004.

In 2005, it rose from under 2 per cent to above 3 per cent, in tandem with monetary tightening by the United States Federal Reserve. It has stayed above 3 per cent since December 2005.

Singapore's interest rates are determined by market forces, as the country's central bank controls monetary policy by managing the Singdollar's exchange rate.

It is unclear how last week's stock-market drama is related to the recent fall in Sibor, as the rate did not move much during the stock-market meltdown in May last year, said economists.

However, one possibility is that nervous investors are taking money out of stocks and keeping them in safer assets.

'One possibility is that there has been a flight to safety by investors,' said United Overseas Bank economist Alvin Liew.

'The sharp correction in the stock market may have caused money to flee to safe assets such as bonds, weighing down bond yields. That may translate into lower Sibor.'

Another possible reason is that negative data from the US has made the market more certain of not one, but two cuts in the Fed funds rate this year.

'The market has priced in a higher probability of two Fed rate cuts, when before the spate of bad news, they weren't even totally sure of one cut,' said Citigroup economist Chua Hak Bin.

The Sibor could fall to 3.1 per cent when the Fed cut finally materialises in the second half of the year, but would stay above 3 per cent this year, he said.

Mr Liew expects the Sibor to bounce back up to above 3.3 per cent soon and said it would be very unlikely to go back to 2005 levels again this year.