With MAS tack, no incentive for interest rates to rise here

Published 10 February 2011
The Business Times
By Siow Li Sen

Other countries have been hiking interest rates to fight inflation but borrowers here continue to enjoy record low rates.

With MAS tack, no incentive for interest rates to rise hereOn Tuesday, China raised rates for the third time since last October in an attempt to keep a lid on accelerating prices. India, Indonesia, Thailand and South Korea have also lifted rates this year to try and cool their hot economies.

But at home, interest rates remain at record lows and even equity fund outflows have made no impact given the Monetary Authority of Singapore’s (MAS) weapon of choice: using the exchange rate to dampen further price increases.

Inflation in December hit 4.6 per cent, a two-year high.

The key 3-month Sibor or Singapore interbank offered rate has remained at 0.43779 per cent since the start of 2011 as the Singapore dollar rose to break below $1.28 to one US dollar. Yesterday it was at $1.2718.

‘The FX-centred monetary policy regime means that Singapore’s short- term interest rates are essentially a function of US short-term interest rates. Hence, Singapore has effectively imported the US’s ultra-easy interest rate policy, despite obvious domestic inflationary pressures,’ said Kit Wei Zheng, Citi economist.

‘Our US economics team expects the Fed to start normalising rates only towards the latter part of 2012 – which, if correct, would imply the Sibor will stay at current low levels through 2011,’ he said.

Most economists expect the Singapore dollar to appreciate further at the April monetary policy review. They estimate the Singapore dollar to strengthen to between $1.24 and $1.21 to one US dollar by year- end.

OCBC Bank economist Selena Ling said local interest rates have no incentive to move and this is due partly to market speculation that MAS could potentially tighten the Singapore dollar exchange rate policy again at the April monetary policy review to combat inflation.

‘This ironically could anchor Singapore interest rate expectations,’ said Ms Ling.

In fact, other Asian countries are finding themselves in a somewhat similar conundrum as Singapore: their currencies become more attractive each time they raise rates .

‘Asia has become the biggest importer of QE (quantitative easing) flows of the world,’ said United Overseas Bank economist Jimmy Koh.

So governments are struggling to use other measures such as raising banks’ reserve requirements, lowering the loan- to-value and imposing some capital restrictions, he said.

‘You can’t control liquidity; you control credit,’ said Mr Koh.

Chia Woon Khien, Royal Bank of Scotland’s head of local markets strategy, emerging Asia, thinks MAS has to find a way to downplay its FX policy, so that investors and traders don’t see the movement of the Singapore dollar as a one- way bet.

‘They need to widen the band, to inject some interest risk premium,’ said Ms Chia.

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