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Plunge in key interest rate may lead to cheaper home loans

Interbank lending rate drops to lowest in three years and is expected to fall further by mid-year

HOMEBUYERS could be in for some cheer in the coming months after a recent plunge in a crucial interest rate that indirectly determines how banks set mortgages.

The three-month Singapore interbank offered rate (Sibor), as it is called, has hit its lowest level since February 2005 and is expected to sink further by the middle of the year.

It is significant as the Sibor is the rate at which banks lend cash to each other and thus influences what consumers pay on loans such as mortgages.

It hit 1.7625 per cent yesterday, down about 0.8 percentage point in a fortnight, and the lowest since the 1.75 per cent level nearly three years ago.

With banks getting cheaper money, it is expected that homebuyers could benefit in turn from cheaper mortgages, although there is usually a lag between Sibor and consumer loan rate movements.

Citigroup economist Chua Hak Bin said: ‘Mortgage rates could head lower in two months.’

But a Sibor fall is bad news for savers as fixed deposit rates could drop too.

Economists say the Sibor’s sharp dip is due to recent interest rate cuts in the United States – with more likely to come later this month, huge capital inflows into Singapore and poor stock market sentiment, which have prompted investors to leave more money in the bank.

CIMB-GK economist Song Seng Wun said: ‘The Sibor’s plunge corresponds with the recent sharp decline in US interest rates and the expectation of more cuts.

‘People have started 2008 with plenty of uncertainty, and are holding on to more cash and being more riskaverse.’

OCBC economist Selena Ling added: ‘It’s due to foreign funds coming in, seeking refuge from the weakening US dollar, and the recent plunges in the equity market.’

The US Federal Reserve has cut key interest rates from 5.25 per cent to 4.25 per cent in recent months.

Market experts predict a further 50-basis point cut later this month as part of moves to avert a possible recession.

Economists expect the Sibor to remain soft, due to the likelihood of further rate cuts and the cautious equity market sentiment.

Dr Chua said: ‘We expect the Sibor to fall by a further 30 to 50 basis points by mid-year, especially if the Fed cuts rates by 75 basis points by the end of the second quarter.’

While home owners welcome a Sibor fall, banks dread it.

It affects their net interest margins because most of their Singdollar corporate and small business loans are linked to the Sibor.

A Deutsche Bank analyst report noted: ‘This plunge is of concern, as we estimate that a 25 basis point fall in the Sibor will eventually lead to a fall in earnings per share of 4 per cent for DBS Group Holdings, 2 per cent for United Overseas Bank and 1 per cent for OCBC Bank.’

And savers will get belted too. Low interest rates combined with the high inflation now building up in Singapore spell ‘negative real interest rates’ – the interest earned on savings will not be able to offset the rise in prices.

Mr Song said: ‘It’s a sign for people not to keep money in the bank, as savers lose out.

‘It’s a good period to borrow, as there is more incentive for people to take money out rather than put it in.’

Thus, Dr Chua advocates that ‘some diversification away might be prudent’.

He suggested alternative instruments such as real estate investment trusts, utility stocks and foreign currency fixed deposits, which offer higher rates, to hedge against inflation risk.


Source: The Straits Times 10 Jan 08

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