US Federal Reserve rate hike expected to impact loans here

The US Federal Reserve raised the benchmark lending rate on Wednesday (13 June) which brings the the federal funds rate to a range of 1.75 to 2 per cent. Being the second increase of the year, the hike signalled that the US Federal Reserve will be more aggressive about rate increases this year.

In announcing that its unanimous decision, the Federal Open Market Committee said that its meeting in May indicated that the labor market has continued to strengthen and that economic activity has been rising at a solid rate.

“Job gains have been strong, on average, in recent months, and the unemployment rate has declined. Recent data suggest that growth of household spending has picked up, while business fixed investment has continued to grow strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy have moved close to 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects that further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective over the medium term. Risks to the economic outlook appear roughly balanced.

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 1-3/4 to 2 percent. The stance of monetary policy remains accommodative, thereby supporting strong labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments.”

The US Federal Reserve interest rate hike is expected to have an impact on credit cards, mortgages, vehicle loans and bank savings accounts here. This is because Singapore interest rates are closely correlated with those in the US.

 

The SIBOR (Singapore interbank offered rate) for example is expected to go up. This could dent some of the enthusiasm in the buoyant property market.

Since the beginning of this year, banks have raised interest rates for both fixed and floating home loan packages by 10 – 30 basis points (bps). Some banks have already upped their mortgage rate to 2.05 per cent, to keep pace with the increasing interest rates.

The 3-month SIBOR has hovered at 1.41 per cent since May. The further increase announced by the US Federal Reserve on Wednesday is expected to drive the interest rates for mortgage loans even higher.

DBS is now charging 1.95 percent a year for each of the three years for its 3-year fixed rate package, while UOB recently increased its 3-year fixed rate package to 2.05 percent a year for each of the three years. OCBC, on the other hand, raised its 2-year fixed rate package to 1.85 per cent.

Tin Min Ying, an investment analyst at Phillip Securities Research Pte Ltd, said last week that SIBOR and SOR will continue their upward trend.

“3-month SIBOR crept up in May to near 10-year highs. We expect the Singapore banks’ NIMs (Net Interest Margin Securities) to be on a gradual upward trend given expectations of 3 or more Fed rate hikes in 2018. NIM expansion will be the main share price catalyst for the next few quarters. Despite the 40bps increase in SIBOR this year, mortgage loans growth has remained resilient at 4.4% YoY. Therefore, we do not expect new mortgage loans to be adversely affected by the gradual increase in SIBOR.”

Tin also said that Singapore’s domestic loans in April grew 5.7% year-on-year.

“Loans growth in April was driven by business loans that expanded 6.1%. Consumer loans growth in April was 5.1% YoY, sustaining the strong momentum we saw since in November. Mortgage loans maintained its steady pace of growth at 4.7% YoY. Car loans growth spiked to 5-year highs with a rise of 7.8% YoY in April.”

Phillip Securities Research said that it was maintaining Singapore Banking Sector at Accumulate as loans growth remains healthy. “The continuing rise in SIBOR and SOR will keep NIMs elevated”, the report said.

Adding: “Volatility in the capital market may place some downward pressure on wealth management business. Banks are benefiting from both expanding loan volume and margins this year.”

Banks, however, are usually slow off the mark in raising the interest rates in response to global news like the US Federal Reserve rate hikes.

This lag time is where a mortgage consultant can best help a distressed buyer to finance a new purchase or to refinance their current property.

Mr Paul Ho, chief mortgage consultant said that it is the most wealthy who usually use mortgage brokers as they see the value in engaging them.

He added: “Younger people are receptive to mortgage brokers and they are also used to price comparison sites like icompareloan.com. Older people tend to think that you are not the bank and so are more apprehensive.”

Mr Ho said that older people tend to place a lot more respect on bankers despite the fact that banks have lowered their criteria for hiring bankers.

“Furthermore, a banker cannot tell you that his bank is not giving you the best packages as his/her role is to sell the bank’s packages,” he said.

If you are concerned about the US Federal Reserve rate hike and considering a refinance of your home loan, the mortgage consultants at icompareloan.com can help you with best home loans assessment for free. If you are home-hunting, our Panel of Property agents are able to help you. Our analysis will give best home loan seekers better ease of mind on interest rate volatility and repayments.

Just email our chief mortgage consultant, Paul Ho, with your name, email and phone number at paul@icompareloan.com for a free assessment.