The Fed interest rates raise is expected to have an impact in Singapore. Interest rates were raised by 0.25 per cent by the United States’ Federal Reserve (Fed) on Wednesday. The increase is the first under new Fed Chairman Jerome Powell. The rate hike was much anticipated as the American economy is expected to grow in 2018, and the statistics for unemployment is near record lows.
In a press statement, Fed said: “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 1-1/2 to 1-3/4 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 objectives of maximum employment and 2 percent inflation,” it added.
Powell told reporters that even with the hike in the FED interest rates, the US’ economy is “healthier than it has been since before the financial crisis. It’s a healthier economy than it has been in 10 years.” He, however, acknowledged that central bankers now consider the prospects of a global trade war as a “more prominent risk” to the economic outlook.
The Fed’s quarterly report predicted the benchmark interest rate to end this year at 2.1 per cent. This means that two more hikes are possible. The FED interest rates may rise to 2.9 per cent at the close of 2019, which means that there may be 3 more increases by that time.
Powell has said that the Fed will gradually raise interest rates toward historic averages while the economy continues to expand, and urged caution when weighing individual Fed officials’ predictions.
“I think like any set of forecasts, those forecasts will change over time and they will change depending on the way the outlook for the economy changes,” Powell said.
The Fed 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 1.3 per cent since 12 Jan. The further increase announced by the Fed 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.
In an environment of rising interest rates, buyers of investment properties should especially exercise caution as it may curb the rise in property prices in Singapore. The rising interest rates, coupled with the weak rental market, may impact the buyer’s ability to service the mortgage on a property.
The Fed’s 1.75 per cent interest rate hike translates into 25 basis points (bps) increase. For every 10 basis points increase on a $100,000 loan over 25 years, the monthly installment goes up by $4.80. This means that for a $1 million loan, the buyer would have to pay an extra S$120 every month.