interest rate path does not change on a dime

Inflation Dynamics Don’t Turn On A Dime

Those were comments by Fed Chair Jerome Powell in a Senate Banking Committee testimony last month when asked about rising yields and inflation expectation.

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It couldn’t summarize better what we have been saying here in this blog for the longest time – interest rates are not going to shoot over the roof in a V-shaped in the next few years.  Yes, US 10-year Treasury yields has risen to 1.60%, roiling stock markets in recent weeks (it has since fallen back a little and stabilised).  Even the benchmark interest rate here SIBOR has inched up by a few basis points last week.  1-month SIBOR is now at 0.28126 and 3-month SIBOR at 0.43714 (as of 3-March).  But that does not necessarily mean that we are going to see prevailing interest rates rise by 100 basis points to go above 2% mark anytime soon.

Fed Chair did concede that coming from a low base, inflation may rise a little in 2nd half of the year but for a quarter of a century US had been experiencing deflationary pressures and that is not going to change overnight.  We will hear more from Powell in the upcoming FOMC meeting this month.

For those new to mortgages and interest rate in Singapore, understand that we monitor Fed speech and actions very closely here as interest rate in the US is the main driver for interest rates in Singapore.  This is because Singapore is more a “price-taker” when it comes to monetary policy as our central bank does not set interest rate but leaves it to market forces or global capital flows.  And what drives interest rate in the US is largely monetary policy from the Fed.

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man in financial distress

We are still of the view that, coming out from a crisis of epic proportion in terms of lives claimed and livelihoods disrupted, it is going to take a while for employment to get back to the same level.  The word that gets repeated in many of Fed’s statement is patience when it comes to rate hikes.  Also, Fed’s emphasis in recent years has swung more to ensuring maximum employment with willingness to let inflation overshoot over 2%.  So, first we have to see inflation get to 2%.

For us, anything short of a rate hike announcement by US Fed, is nothing more than a false alarm.  Even when the Fed finally decides that inflation has overshoot 2% for sufficiently-long time and hike its fed funds rate from zero, it might still be alright to wait for a few quarters to see if those hikes are sustained.

The only thing I would add is – we do expect banks to take the opportunity now (with SIBOR moving a little) to raise fixed rate home loan packages and already we are seeing a few doing that.  As fixed rates are at a historical low at 1.15-1.25%, for those who won’t mind paying more interest in exchange for a peace of mind, you will need to act fast.  For those on floating rate home loans, if you are starting out from a low base like 1%, even if prevailing rate gets up to 1.50-1.60% over the next few years you will be alright too, as your average cost of funds is still going to be more or less the same as fixed rate today.  But you’ll benefit immediately each time SIBOR starts moving and end up being a false start which happened in 2016.  For this reason, we are not flinching yet from our recommended stance of going floating rate.

We are not convinced that the rise in SIBOR will be sustained.  In fact, we think no rise in interest rates trajectory will be sustained without Fed hikes.  

start stop of interest rate hikes

And like we always say in this blog, there will be more than sufficient time to switch to fixed rates when Fed eventually hikes.  That’s the best time to go fixed as you are more likely to catch the 3-year period where interest rates actually go up steadily, rather than the many start-stops before it happens.  For proof of this and how interest rate in Singapore is hugely correlated to that in the US, see the interest rate cycle

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