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Published October 16, 2010

Sibor slides further, almost hugs the floor

Prospect of faster Sing-dollar gains puts pressure on interest rates

By CONRAD TAN


INTERBANK rates here fell by the most in nearly six months yesterday, putting pressure on banks' lending margins, after the Monetary Authority of Singapore's (MAS) surprise move on Thursday to allow faster gains in the Singapore dollar.

The three-month interbank offered rate for Sing-dollar loans, or Sibor, fell to a new low of 0.47014 per cent yesterday, from 0.49667 per cent on Thursday - the biggest one-day drop since April 26.

The one-month Sibor, which had stayed at 0.37500 per cent since April 20, fell to 0.34792 per cent yesterday. The interbank rates for six-month and one-year Sing-dollar loans also fell - by the most since January last year - to 0.59375 per cent and 0.80556 per cent, respectively, Bloomberg data shows.

On Thursday, MAS widened and steepened the trading band for the Sing dollar, making room for further gains to fight inflation.

Its actions sent the currency soaring to a record high against the US dollar, but also put immediate pressure on interest rates here, forcing them down. Investors accept lower interest on Sing-dollar assets if they expect more gains from currency appreciation.

'By fuelling expectations for faster Sing-dollar appreciation, the slope steepening drives short-term Sing-dollar interest rates lower,' Citigroup economist Kit Wei Zheng said in a report yesterday.

The lower rates will make it even harder for banks here to boost their net interest income from lending - their biggest source of revenue.

Meanwhile, savers who are already earning almost nothing on their deposits could soon earn even less. Yesterday, DBS Group cut the interest that it pays on the first $100,000 in POSB savings accounts to just 0.1 per cent. Previously, it paid 0.125 per cent for the first $50,000 and 0.25 per cent for the next $50,000.

Near-zero interest rates and poor growth prospects in the United States and Europe are prompting investors to seek higher yields elsewhere, and some analysts have warned that the prospect of faster Sing-dollar gains could attract even more money into Singapore, pushing up the prices of property and other assets. Yesterday, the Sing dollar gave up some of Thursday's gains to trade at around 1.2950-1.2980 against the US dollar. At 7pm, one US dollar bought 1.2965 Sing dollars, compared to 1.2955 a day earlier.

But the US dollar continued to slide against other major currencies, after the MAS move on Thursday spurred widespread buying of Asian currencies in anticipation of further gains.

Traders were also awaiting a speech by US Federal Reserve chairman Ben Bernanke yesterday, looking for clues about how much money the central bank plans to pump into the economy through asset purchases. The US Treasury was also expected to deliver a twice-yearly report on China's currency policy that could stoke tensions between the two governments.

At 7pm, the dollar index, which measures the strength of the US dollar against six major world currencies, was down 0.2 per cent at 76.516 - extending its fall this week to one per cent. The index has dropped 4.9 per cent since Sept 21, when the Federal Reserve signalled that it could resume purchases of US government bonds and other securities to support the economic recovery.

The war of words over currency policies continued yesterday: China hit back at Japan's Finance Minister Yoshihiko Noda, who had earlier this week criticised both China and South Korea for keeping their currencies weak, making their exports relatively cheaper than Japan's.

The yen has been trading near its highest level in 15 years against the US dollar, prompting Mr Noda to repeat yesterday that the government would intervene again to weaken the yen if necessary, after doing so last month.