http://www.straitstimes.com/archive/...thens-20150106

Swap Offer Rate spikes as US dollar strengthens

Interest rate benchmark at a high not seen since global crisis in 2009

Published on Jan 6, 2015 1:28 AM

By Mok Fei Fei


A KEY interest rate benchmark that determines some home loans has shot up to levels not seen since the depths of the global financial crisis in May 2009.

The three-month Swap Offer Rate (SOR) - as the benchmark is called - hit 0.74893 per cent on Friday.

The rate has been trending up for a couple of months after staying between 0.2 per cent and 0.25 per cent from January to October last year.

It crossed 0.3 per cent in November and rose to 0.4 per cent last month, before steadily inching up to pass 0.7 per cent in recent days.

Expectations of a United States rate hike and the consequent strengthening of the greenback have driven up the SOR, said economists.

"Primarily, it's because markets are pricing in the rate hike and regional banks have also been trying to extract more funds here, leading to the tightening of liquidity conditions," said Barclays Capital economist Leong Wai Ho. He added that the situation is not unique to Singapore, noting the rising rates in Malaysia as well.

DBS economist Eugene Leow said adjustments in Asian foreign exchange rates against the US dollar are now under way as the market pre-empts an eventual policy shift in the US.

"The market is convinced about the strength of the US economy, resulting in fund flows towards the US in anticipation of tighter Fed policy," noted Mr Leow. "Accordingly, economies in the region are facing pressures on their currencies or interest rates."

The SOR has also risen much faster than another key benchmark, the Singapore Interbank Offered Rate (Sibor).

It ended 2014 at 0.73782 per cent, up from 0.22126 per cent at the end of 2013 - a rise of 233.5 per cent - while the Sibor rose from 0.40267 per cent to 0.45697 per cent, an increase of just 13.5 per cent.

The SOR rose 74.9 per cent in December alone compared with the Sibor's 6.7 per cent gain.

The SOR is based on a formula that takes into account the current and expected exchange rates of the US dollar against the Singdollar and the local interbank lending rates for the greenback.

Sibor, meanwhile, is the rate at which financial institutions lend unsecured funds to one another.

Economists note that the nature of the SOR makes it much more reactive and volatile than Sibor, as it essentially swaps between the US and Singapore dollars while the Sibor is more dependent on local conditions.

The Singdollar dropped 1.3 per cent against the US dollar last month, declining from 1.3044 to 1.3217.

United Overseas Bank economist Alvin Liew said the trend of a rising SOR is likely to persist this year: "We think the SOR will be higher than the Sibor at each tenure, but we don't think the spread will systematically get wider as the year progresses unless the US dollar rally is much stronger than what we project."

OCBC economist Selena Ling noted that the phenomenon of a higher SOR is not unusual.

"Actually, before May 2009, the three-month SOR has always been higher than the three-month Sibor; so, in a sense, the recent overtaking by SOR over Sibor could be seen as normalisation."

UOB forecasts that the three-month SOR could hit 1 per cent by the end of this year, while OCBC tips 1.1 per cent.

The SOR and Sibor are commonly used by banks to set floating rates for home loans, but the impact of the SOR's dramatic rise would be smaller.

Mr Sean Lim, head of mortgage at financial products portal imoney.sg, estimates that just about 20 per cent of his clients are on SOR-pegged rates.

"Over the past month or so, the rise of the SOR has been quite shocking and I would say that a customer looking for a mortgage today has very little reason to take up the SOR."

He added that only two banks - the Bank of China and ANZ - are still offering mortgages pegged to the SOR in the market.

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DRAMATIC RISE

Swap Offer Rate (SOR)

End 2013: 0.22126 per cent

End 2014: 0.73782 per cent

Increase of 233.5 per cent

Singapore Interbank Offered Rate (Sibor)

End 2013: 0.40267 per cent

End 2014: 0.45697 per cent

Increase of 13.5 per cent