US Rate hike could strain the Singapore landscape

SINGAPORE: The US Federal Reserve’s latest decision to keep key lending rate unchanged was widely anticipated, but policy makers expect to raise rates twice more for a total of three increases for 2017 – more hikes than they had made in the previous 10 years combined.

But while a move like that could send markets soaring, an analyst said it could also spell bad news for some in Singapore.

That’s because Singapore’s benchmark lending rates look set to rise in tandem with any further increases in US interest rates.

These are the Singapore Interbank Offered Rate and the Singapore Swap Offer Rate, which are commonly pegged to commercial and home loans.

For instance, home buyers in Singapore will have to cough up more to pay for their mortgages while companies will find it even tougher to service their debts.

Mr Stephen Innes, a Senior trader at OANDA, noted that Singaporean companies who make payments in US dollars are likely to suffer.

“Business has to consider the volatility of foreign exchange markets, and they have to use prudent hedging mechanisms, not only for the components or commodities that they’re bringing in to manufacture these finished goods. But for companies that are exporting to the US, they have to be opportunistic hedgers, take advantage of the strengthening of the US dollar to hedge some of these transactions. Sitting idly is probably one of the worst things to probably do.”

However, Mr Innes mentioned that banks could stand to benefit from what seems to be the US central bank’s most active year of tightening in a decade.

He said: “Typically banks will do better when interest rates are going up because they can borrow cheaper and lend out more expensive.”

Channel NewsAsia

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Stephen Innes

Stephen Innes

Head of Trading APAC at OANDA
Stephen has over 25 years of experience in the financial markets and currently based in Singapore as the Head of Trading Asia Pacific with OANDA. Stephen's market views focus on the movement of G-10 and ASEAN Currencies. His views appear in Bloomberg, CNBC.Reuters, New York Times WSJ and the Economist. His media appearances include Bloomberg TV & Radio, BBC International, Sky TV, Channel News Asia, ASTRO AWANI and BFM Malaysia. Stephen has an extensive trading experience in Spot and Forward FX, Currency and Interest Rate Futures, Money Market Derivatives and Precious Metals. Before joining OANDA, he worked with organisations like Nat West, Chemical Bank, Garvin Guy Butler, and Sumitomo Mitsui Banking Corporation. Stephen was born in Glasgow, Scotland, and holds a Degree in Economics from the University of Western Ontario.
Stephen Innes