Interest rate plunge brings property cheer and fears

Local interest rates plunged to all-time lows following the appreciation of the Singapore dollar against the US unit. This gave home buyers reason to cheer.

The key three-month Sibor or interbank rate fell 0.7 per cent to a record low of 0.49667 per cent as more money flow is expected here in anticipation of currency gains. This is after an unexpectedly hawkish monetary policy statement from the Monetary Authority of Singapore (MAS).

The three-month Sibor against is now 10 per cent lower from 0.5500 per cent couple months ago.

Experts say that the drop in interest rates to new depths will renew risk of a property bubble. This may prompt additional government measures.

The decision to let the Sing dollar appreciate is a pre-emptive move to fight inflation. MAS expects inflation to reach 4 per cent by year-end and remain high in the first half of next year before moderating.

Domestic inflation increased significantly from 0.9 per cent in Q1 to 3.2 per cent in July-August.

Chua Hak Bin, director, global research for Bank of America Merrill Lynch, said MAS’ decision to steepen the appreciation path does not look timely.

‘Asian central banks are already grappling with surging capital inflows, with funds rushing to find attractive places to park their liquidity’, he said.

Mr Chua estimates that the latest policy of ‘offering a higher rate of appreciation is equivalent to offering a higher return (equivalent to 3 per cent versus previous 2 per cent), which will risk inviting even more capital inflows.’

Selena Ling, OCBC Bank economist, said her prior end-2010 forecast for three-month Sibor was 0.5 per cent, and this move may potentially impart a 5-10 basis point downward bias’.

‘Market sentiment is already fairly upbeat in terms of global risk appetite, and any emerging signs of further froth in the domestic property market would probably be quickly met with a policy response,’ said Ms Ling.

Morgan Stanley said it would be difficult for MAS to try to raise domestic interest rates. ‘Depressed domestic interest rates may come with potential ramifications on asset markets like property. If prices continue to run up too quickly, we would not be surprised to see more sector-specific policy action,’ it said.

Wei Zheng Kit, Citi’s economist said with the Sing dollar likely to price in greater appreciation in response to the MAS policy, it may drag Sibor lower and fuel asset price inflation.

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