Nov 12, 2008
Sibor falls to 4-year LOW
Bad news for savers, good news for mortgage owners
By Gabriel Chen
This benchmark rate, known as the three-month Singapore Interbank Offered Rate (Sibor), has been highly volatile of late. -- PHOTO: AGENCE FRANCE-PRESSE
THE all-important interest rate at which banks lend funds to one another has nosedived to 0.89 per cent - its lowest level since mid-2004.
This is likely to be good news for many home owners, who are set to enjoy lower mortgage rates soon. Rates on other consumer loans may also fall.
But the outlook is not so good for investors holding fixed deposits - as their interest rates are likely to fall as well. And businesses big and small will not necessarily get a flow-on benefit of lower borrowing costs. This benchmark rate, known as the three-month Singapore Interbank Offered Rate Sibor), has been highly volatile of late.
In September, it spiked to 2 per cent as the global credit crunch hit home here in a big way as banks were afraid to lend to one another for fear of not getting repaid.
Today, the three-month Sibor, to which many home loans are pegged, is at its lowest point since July 2004.
Economists say the aggressive interest rate cuts by central banks around the world as well as massive doses of liquidity injections to thaw frozen credit markets are working.
'Fears of the credit crunch and counterparty failure risk have also in part subsided slightly recently, partly due to the extension of deposit guarantees and government bailouts for troubled financial institutions in countries like the United States,' said OCBC economist Selena Ling.
All these explain why the three-month Sibor - which closely tracks the benchmark US federal funds target rate - is easing.
And it will continue to stay low in the near term, economists say.
Standard Chartered Bank economist Alvin Liew expects it to decline to 0.8 per cent early next year. 'We expect the three-month Sibor to decline in early 2009 to well below 1 per cent and remain around that depressed level for most of next year.'
Fixed deposit rates, even those on a promotional basis, could trend lower if Sibor remains low. Foreign banks appear to have less need to pull in deposits by dishing out attractive promotional fixed deposit rates, as they had done in recent months when credit was very tight, one banker said.
This is because the recent deposit guarantee announced by the Monetary Authority of Singapore has helped to dispel the perception that foreign banks are not as safe as local banks.
'The lower cost of funds is more icing on the cake for foreign banks, as they can tap the interbank market for funding,' he said.
For home owners, any loan pegged to Sibor will mean a lower rate.
'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,' said Mr Dennis Khoo, Stanchart's general manager of lending.
While Sibor is unlikely to bounce back as quickly and sharply as it has fallen in the last two months, bankers say those looking for fixed cash flow and protection against interest rate movements should opt for fixed-rate home loan packages.
For the banks themselves, interest rates are but one consideration in determining the prices of housing loans.
In contrast to the booming property markets in 2006 and early last year, banks now have to contend with increased capital costs and 'potentially higher delinquencies' amid the current financial turmoil, said OCBC's head of consumer secured lending, Mr Gregory Chan.
However, businesses may not necessarily benefit from the lower Sibor.
In the past, both small and large businesses could have expected lower borrowing costs from a falling Sibor, but current conditions may negate this, bankers say.
While there are exceptions to the rule for certain customers, banks will price in higher spreads between borrowing and lending costs in the months ahead to reflect greater credit risk in these recessionary conditions.
'In deciding pricing for corporate lending, banks would also incorporate their liquidity premium in the pricing,' said Fortis Bank head of corporate banking for Asia-Pacific Patrick Tan.
Given today's tight liquidity, banks generally are pricing their own cost of borrowing into what they lend out to their customers, he said.
Citigroup economist Kit Wei Zheng warned that a smooth ride out of the crisis is far from assured.
'The economic weakness that we now see could still feed back into the financial sector, which may then spark another round of risk aversion and possible future spikes in interest rates.'
gabrielc@sph.com.sg
Sibor is likely to remain low in the near future. Another fiscal policy that one should be aware of is the weakening of SGD against USD. This is usually done to boost exports out of Singapore in order to stimulate the economy.
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