federal reserve of United States

Correlation Between SIBOR & US Fed Funds Rate

We do occasionally get this question – what is the correlation between the two? We do know that when it comes to interest rates in Singapore, we are a price taker as our central bank does not use interest rate as a lever in its monetary policy; it uses foreign exchange against a basket of trading currencies. We also know as well historically our SIBOR tracks the movements in the US Federal funds rate, as when US interest goes up, funds flow back in search of higher yields leading to drying up of liquidity in our banking system.

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However we do not know precisely how close is this correlation, so as talk of a June rate hike looms large in recent weeks, I thought it might be an appropriate juncture to look at it on the graph : momvements of our 3-month SIBOR against that of US Federal funds rate. So here it is:

graph showing correlation between SIBOR and fed funds rate

Since 2009 our SIBOR has actually hovered above the US Federal funds rate for the longest time and in fact it has pre-empted the rise of interest rates in US with SIBOR starting to rise since beginning of 2015 whereas US Fed finally raised its rate for the 1st time only a year later (Dec 2015).

There is a strong but not perfect correlation between the two interest rates when we look back on the past 30 years. For most parts indeed, SIBOR takes its cue from movements in the funds rate except for brief periods like in 1989 and again in 1995-1997 where this pattern is broken and in fact went in reverse direction. It will be hard to explain that.

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US Fed funds rate also tend to rise by a much higher magnitude than SIBOR and in fact stays above SIBOR almost throughout this period up till just before the Great Recession of 2008. If this trend persists, the good news is that we speculate, as SIBOR has now run ahead of itself in the lead up to rate hikes expectation, at some point SIBOR will slow down and go flat instead in order for it to converge with the rising US Fed funds rate. This will happen so that we can revert back to the normal cycle where the more volatile funds rate will rise and stay above SIBOR as we have seen in past three decades.

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