Dice showing home loan interest rate can go either way up or down

Interest Rate Forecast: Will It Start Rising In 2021?

After a tumultuous 2020, may 2021 be a better year for all of us!  Happy New Year.

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I get to the point straight.  Going forward (from 2021), in a break with our tradition here at MortgageWise, we will not be dishing out any more forecast on interest rates.  You can say that our forecast since last year remained intact – that interest rates will stay “lower-for-longer” for a considerable time.  In that sense, there’s really nothing to forecast except that interest rate will trend flat for this year and most likely next, until we see US Fed sustaining a path of interest rate hikes.

I understand coming back into a new year, there is euphoria all around and that’s why the stock market has rallied and 10-year yields have moved back up above 1%.  First, there’s vaccine roll-out all over the world to get back to normal.  This is followed by a new Biden administration and what’s looking like a Democratic blue sweep through US Congress that’s set to pass new laws decisively, ie.more stimulus and fiscal spending.  Incidentally, the stock market in the US has long been detached from the realities in the real economy.  In the first place the stock market has always been a pre-cursor to the economy as it reflects the expectation of future and not current earnings.  However, I think that pre-emptive nature of the stock market is now marred by the abundance of liquidity ever since QEs (quantitative easing) were first introduced by the Fed back in 2009.  And now we have QE unlimited as explained in an earlier article.

Notwithstanding all the euphoria and good news in the market, we still do not think that Fed will suddenly backtrack on its indicated stance of holding rates at zero till 2023.

Many had and continue to underestimate the effects of QE or liquidity that’s wreaking havoc on everything in the financial world from savings rate, interest rate, yields and margins, stock market prices, property prices to the biggest problem now – anaemic inflation!  And without inflation there’s no reason or need for the US Fed to hike rates, which also means there is little movement in interest rates here in Singapore (now you know why banks like to sell you fixed rate home loans since 2019, which are higher margin to the banks).

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Of course, that’s not the only reason why inflation is not rearing its ugly head in US (and many other parts of the world) in the last decade.  Other reasons commonly cited by analysts include the changing demographic profile in the US (people start to spend less and save more for retirement), advent of internet and e-commerce (erosion of pricing power by companies) and falling energy prices.

Whatever is the real cause or combination of factors that has resulted in a flattened Phillips curve (economic theory that a rise in wages will eventually lead to a rise in inflation) as cited by Fed Chair Jerome Powell, I do not see any of these forces changing course in the midst of a pandemic.  If anything, they have been intensified further by the pandemic in the following ways:

  • Unemployment in US is still high at 6.7% (Nov 2020), though it has eased off significantly from 14.7% at the height of the pandemic back in Apr 2020, which means more people are out of job and just making both ends meet.
  • WFH and social distancing has precipitated digitalisation which only drives more consumers to buy online, further disrupting brick-and-mortar retailers.
  • With less people on the roads and less air travel, it all adds up to a lower demand for oil and energy prices.
  • A super-charged stock market with exploding demand from millennial traders of Robinhood accounts for example, and the insatiable demand from institutions searching for yield has increased the risk of a major stock market bubble bursting which will eventually lead to hardships and less spending.
  • Most importantly, the massive liquidity from unlimited QE is now driving up asset prices everywhere but driving down inflation and everything else, though the Fed will most likely put a stop to QE sooner than initially thought.

Our simple notion here is this: If inflation was so weak to make any significant impact after three rounds of QE in the last decade, what makes you think that it would rise up quickly now after the “mother of all QE” in this decade?

We still don’t see how that could happen despite all the talk about a swift recovery once 80% of the world’s population gets vaccinated and huge fiscal spending and stimulus driving up inflation by end of the year.  Didn’t we hear those same familiar lines after Donald Trump’s election win in 2016 where the narrative then was on tax reforms, deregulation and yes fiscal spending?

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Now you may ask what has all that got to do with my home loan here in Singapore?

We are not political analyst or economist.  But here at MortgageWise, we look at inflation in the US and watch the Fed very closely, as that has got everything to do with which way interest rates will move in the next few years.  So, we rather talk more about that in this blog rather than things like Singapore’s economy, property prices, etc. 

Our sole undivided focus in this team is to help our clients make the best decision on which home loan package to take up, and to help them plan ahead before their next lock-up period ends.  It’s a partnership which I am glad many can attest to the value that we bring over time, not just once.

Finally, let’s come back to the topic of interest rate forecast and a summary of our discussion so far.  Our forecast this year is no forecast really.  Interest rate will stay depressed for long periods.  In the last crisis of 2008, it took almost 6 years before Fed started embarking on a sustained path of 9 hikes over 3 years (2016-2018) to bring the fed funds rate from near zero to peak out at 2.50%.  This time round it may take 6 years or even longer.   

Remember, there will be many false starts in that process of normalization.  Fed may start to get cold feet when macro environment changes such as:

  • Vaccine loses its efficacy over time (not known yet how long its effect will last)
  • Virus mutates and vaccine loses its effectiveness
  • Stock market crashes significantly with monetary tightening or simply asset bubble bursting in due course
  • US debt burden leads to dollar crashing and losing its status as the world’s reserved currency as central banks start ditching the dollar – another financial crisis in the making?

Of course, we cannot be 100% sure in our rates outlook and we can be wrong.  But like what we share with so many of our clients, the question is – can we afford to be wrong and the answer is yes!  There will be more than enough time, more than the 2-year lock-in period, to switch out of floating to lock down fixed rates later on.  When it becomes glaringly clear that the Fed has started hiking rates again without causing any “taper syndrome” in financial markets.  That, to us, is the right point in time to start paying a premium, so that you lock down fixed rates only when interest rates are already on its way up.  This not only justifies the premium paid, and also ensures that we get the maximum mileage from the 3-year fixed rate period.

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