Mortgage Loan In Singapore

Fed Projects 3 Hikes In 2017

Last December we saw US Fed made that historical first rate hike in almost a decade and projected 4 more hikes or a full percentage point increase in federal funds rate in 2016. That turned out to be overly-optimistic and we only had one hike 12 months later. This time round Fed hiked the funds rate by 25 basis points as widely expected, to between 0.50% and 0.75%, and further projected 3 hikes each year from 2017 to 2019. Will that turn out to be overdone once again?

The truth is no one knows the answer, not even Janet Yellen who conceded as much. “We are operating under a cloud of uncertainty at the moment,” she said when asked about details of the stimulus plan and how much of it Congress will pass.

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The Fed, in its latest and final FOMC for the year, also forecast the federal funds rate to hit 1.4% at the end of 2017, up from its earlier estimate of 1.1%. The same upward revision was also seen for its estimate for 2018 and 2019, ending the year at 2.1% and 2.9%, up from its previous forecast of 1.9% and 2.6% in September. In short, the Fed has given the US economy a vote of confidence that it will continue on its recovery path factoring in the prospect of fiscal stimulus by the Trump administration who has promised tax cuts and infrastructural spending of up to US$1 trillion.   Hence it raised the number of rate hikes in 2017 from its previous estimate of two to three.

Indeed what is different this time round is the imminent boost to the US economy from government spending and tax cuts, something which I think will happen given a Republican-led Congress. Personally I am not too certain how infrastructural spending will drive a broad-based recovery but I do believe tax cuts will put money into the hands of US consumers and businesses which might finally begin to expand in anticipation of higher demand and to take advantage of lower cost of funds while they still can. There is also the other factor of a gradually-stabilizing oil price at near US$60 per barrel after two years of rout, as long as the oil-producing countries get their act together in cutbacks including the US shale producers.

However the biggest spanner to throw in is that of a rising US dollar, and to some extent the threat of trade wars with China. There are various forces at play here including cheaper imports for US market putting a lid on inflationary forces, lower repatriated profits for US companies with vast operations outside of US, more funds flow back to US and the rush for US assets etc. I am no economist and I cannot tell you what is the net effect of all that. I can only say going into 2017, with a US economy at full employment and the impetus from tax cuts, there is real threat of inflation rising and I do see interest going up after the cold harsh winter months.

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Hence at MortgageWise, we are maintaining our earlier forecast of 1-2 rate hikes but only in the 2nd half of 2017. As we are Singapore-based, the question is how does that translate into our outlook on mortgage interest?

SIBOR against US Federal Funds Rate

With a strong but imperfect correlation between the federal funds rate in US and the benchmark 3-month SIBOR in Singapore, we can only assume that it follows the same pattern. With continued capital flight out of Singapore in search of higher yields, and the possibility of more borrowers deleveraging in the midst of rising interest rate, we see SIBOR rising to 1.50 by end of 2017.

The next thing to watch is who amongst the four lenders in Singapore with DMR home loans would make the first move on its DMR in a bid to raise interest margin. We will not be surprised that happens over the next few days.

 

At MortgageWise, we seek to provide thought leadership in the area of mortgage planning in Singapore, taking deep dive into developments and news on mortgages & helping clients track interest rate movements.  We do not just go for one-time business with clients but rather choose to build long trusting relationships by giving truly independent advice to the extent of losing the deal.  We strive to become the first-choice mortgage partner for homeowners and the creditable distributor of mortgage products for banks and financial institutions in Singapore.

 

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About Darren Goh

Darren Goh is the Executive Director of MortgageWise.sg, a thought leader in the Singapore mortgage industry, with frequent interviews and quotes by the press - Business Times, Straits Times, Zaobao and EdgeProperty for his views on the latest mortgage trends. He is an avid property investor with successful careers in banking & real estate before becoming an entrepreneur.
View all posts by Darren Goh

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