Monday, June 27, 2011

Low rates to stay down

HOME owners can rest easy: Interest rates will stay at rock-bottom levels at least for another year, say economists. But that's just another 12 months of bad news for savers, who will have to keep looking for higher returns. The possibility th...
HOME owners can rest easy: Interest rates will stay at rock-bottom levels at least for another year, say economists.

But that's just another 12 months of bad news for savers, who will have to keep looking for higher returns.

The possibility that interest rates could be on their way up was raised after the Monetary Authority of Singapore (MAS) proposed a standard factsheet for banks offering home loans. It was meant to highlight how their loan repayments could rise if interest rates go up.

National Development Minister Khaw Boon Wan has also warned that interest rates cannot stay low forever.

Interest rates have fallen to record low levels and stayed there since the United States Federal Reserve slashed its own interest rates to near-zero, to boost growth amid the global recession.

The three-month Singapore dollar Swap Offer Rate, a popular benchmark rate used for home loans, hovers at just 0.2 per cent today, but was more than 3 per cent five years ago, while the three-month Singapore Interbank Offered Rate (Sibor) has stayed at a record low of 0.44 per cent since January.

The low interest rates here are in contrast to higher rates in the rest of Asia, as central bankers have hiked rates to combat the higher prices of food and fuel.

But Singapore has remained the exception. The MAS uses the exchange rate as its monetary policy tool to fight inflation, given the large export dependence of the economy.

As a result, Singapore's interest rates have tended to move closely with the US Fed funds rate.

There appears to be little upward pressure on interest rates here.

A Straits Times check with six banks that offer term deposits and home loans showed that none had raised interest rates or the spreads on its home loans this year.

Citibank said its one-year term deposit rate had even been lowered from 0.3 per cent to 0.25 per cent in January, and it continues to offer mortgage rates at Sibor plus 0.7 per cent.

A sign of uncertainty over interest rates could be evident if more home buyers turned to fixed rates rather than floating packages.

Mr Peng Chun Hsien, head of secured finance solutions at Citibank, said the proportion of applicants requesting fixed rate loans compared with those wanting floating rate loans has actually dipped from about one-third to less than one-tenth, with 'rates looking rather benign'.

The low-interest-rate environment has led to a surge in demand for property.

But buyers know that these low rates will eventually have to rise, said Mr Patrick Liew, chief executive of property agency HSR.

OCBC Bank economist Selena Ling said: 'While the fact is that interest rates will eventually rise, the question has been when.'

The possibility of a Fed rate hike at the end of this year had strengthened as the global recovery appeared to be on solid ground earlier this year, she said.

But a recent spate of disappointing economic data out of the US, an escalation of fears in Europe as Greece heads towards a debt default and the supply disruptions caused by the Japanese earthquake and tsunami have now put paid to that notion.

Ms Ling said: 'We are not looking for a big spike in Singapore interest rates. If anything, cues from the Bank of England and the Fed show that essentially because of a growth slowdown, they will keep monetary policy soft for longer.'

Barclays Capital economist Leong Wai Ho forecasts a Fed rate hike only in July next year.

'The rates rises will be immediate, so it is quite conceivable that by the end of July 2012 we could see mortgage rates in Singapore rise by 75 basis points,' he said.

So a rise in borrowing rates is imminent, but not immediate. And for now, home buyers appear little moved by the looming rate hike, said ERA Realty key executive Eugene Lim.

'Generally, people are aware that interest rates will go up, but because they are very, very low now, it is not a big concern for them. Buyers say: 'How far can it go up?' They believe that they will have time to take evasive action if necessary,' he said.

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