Ravi Chandran
The United States (US) Federal Reserve’s September meeting minutes showed that American policymakers unanimously backed the central bank’s last rate increase and that US interest rate is expected to increase further this year. This is the the eighth time that the FOMC has raised rates since the 2008 financial crisis, and the third time this year.
Another increase in US interest rate is expected in December this year.
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Last month, the FOMC chairman Jerome Powell said that the decision to raise US interest rate to a range between 2 and 2.25 per cent and that the increase was not intended to get in the way of continued growth of the US economy. “My colleagues and I are doing all we can to keep the economy strong, healthy and moving forward,” he said. But his decision was criticised by the American President Donald Trump, who said he was “not happy” with higher rates.
It seems like the FOMC will disregard the Trump’s criticism and raise US interest rate again this year.
In early August, US interest rate set at a range of 1.75 – 2 per cent earlier were left unchanged by the Federal Reserve by a unanimous vote. In keeping the interest rates unchanged, the Federal Reserve said:
“Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has stayed low. Household spending and business fixed investment have grown strongly. On a 12-month basis, both overall inflation and inflation for items other than food and energy remain near 2 percent. Indicators of longer-term inflation expectations are little changed, on balance.”
The Federal Reserve raised the benchmark lending rate on June 13. Being the second increase of the year, the interest rates set signaled that the US Federal Reserve will be more aggressive about rate increases this year.
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US interest rate set to rise is bad news for borrowers in Singapore. This is because the US Fed rate hike has 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 in early June 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.”
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Tin also said that Singapore’s domestic loans in April grew 5.7% year-on-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, “there may be a short window of opportunity for home-owners to refinance their home loans before the Federal Reserve interest rates set to increase, take effect.”
He added, “the mortgage consultants at iCompareLoan can get the best rates for home owners who want to refinance their home loans by comparing across 16 banks and financial institutions – and best of all, our services are free.”
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