3-month SOR plunges amid higher inflation forecast

Published 18 February 2011
The Business Times
By Siow Li Sen

This will benefit borrowers whose home loans are pegged to it

Home loan borrowers on loans pegged to the Singapore swap offer rate (SOR) must be jumping for joy. The three-month SOR interest rate just plunged to pretty much rock bottom levels of 0.136 per cent, following the government’s upward revision of inflation forecast yesterday.

3-month SOR plunges amid higher inflation forecastThe SOR, which is affected by forward foreign exchange rates, has now halved from 0.27 per cent in October, barely five months ago. OCBC said that a borrower taking out a $1 million loan for 35 years will shave $59 off his monthly instalment based on the latest SOR rate compared to October last year.

Both OCBC Bank and United Overseas Bank (UOB) which offer SOR-linked home loans have seen more customers opting for them.

‘The demand for SOR-pegged home loans is primarily driven by the prevailing low SOR. Borrowers who prefer this package also view the SOR as more transparent, being closely linked to the interest rate market,’ said Phang Lah Hwa, OCBC Bank head of consumer secured lending.

‘In view of the current low interest rate environment, SOR home loan is a popular choice with customers. It allows customers to capitalise on the lower interest rate and maximise their interest savings,’ said Chia Siew Cheng, UOB head of loans division.

Yesterday, the government revised the 2011 inflation forecast from 2-3 per cent to 3-4 per cent.

‘In particular, inflation is expected to rise further to 5.0 to 6.0 per cent in the first few months of this year,’ said the Ministry of Trade and Industry.

The Monetary Authority of Singapore uses the exchange rate to fight accelerating prices and with the upward revision of inflation numbers, markets were pricing in a stronger Singapore dollar.

‘Market expectations for a potential tightening of monetary policy come the April review have been heightened even before the official inflation forecast hike, so it’s to be expected and likely to be sustained at least in the very near-term,’ said Selena Ling, OCBC Bank economist.

Many variable home loan packages are pegged to either the three-month Singapore interbank offered rate (Sibor) or the three-month SOR.

The three-month Sibor yesterday remained unchanged at 0.43751 per cent, a record low since the beginning of the year.

The Sibor is typically less volatile and may move after April’s monetary policy review. Market observers speculate that the dramatic SOR movements is due to MAS’ reluctance to ‘sterilise’.

Sterilisation, which is removing liquidity from the system so as to moderate the fall in interest rates, could be expensive. Said Chia Woon Khien, Royal Bank of Scotland’s head of local markets strategy: ‘There have been lots of positions piling into the Singapore dollar. We are still seeing MAS sterilising in the FX forward swaps but it might be (that) the tide is simply too strong.’

‘The recent fall in SOR rates may have also been possibly exacerbated by the MAS’ incomplete sterilisation of its FX interventions via its FX swaps,’ said Citi economist Kit Wei Zheng.


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