The US Federal Reserve (Fed) increased interest rates by 25 basis points in March for the sixth time since 2015. This simply means interest rates in the US have increased by 0.25%, and are currently hovering between a range of 1.50% and 1.75%.
Further, the Fed signalled there would be up to two more rate hikes in 2018, and it raised its forecast on continuing rate hikes through to 2020.
While this has happened in the US, we cannot ignore the implications this will have on Singapore and Singaporeans. This is because Singapore manages an exchange rate based monetary policy, pegging the Singapore Dollar to a basket of currencies, of which the US Dollar is a primary component. What this means is that interest rates in Singapore are closely tied to interest rates in the US.
As the increasing interest rates in the US is likely to have an impact on Singapore’s interest rates. We highlight four ways Singaporeans may be affected by the increasing interest rate levels.
# 1 Loans
An increase in interest rates will translate to higher borrowing costs. For Singaporeans, this means any money that we’ve borrowed from banks and other financial institutions will need to be repaid at a higher interest rate.
Of course, this includes our home mortgages which are likely on floating rates. Floating rates are usually pegged to the Singapore Interbank Offered Rate (SIBOR) or Singapore Swap Offer (SOR), which will also increase in tandem with the Fed rates. Note, this shouldn’t affect HDB loans, which carry an interest rate of 2.6% currently.
Typically, homeowners have to refinance their mortgages every two to three years to benefit from lower interest rates, after coming out of a fixed rate. For those coming off promotional fixed-rate packages, they could see their home mortgages increase by close to 1.0%.
For those who invest in property, an increase in interest rates could have large implications on returns. While property prices are showing strong signs of recovery, you should also be aware of the risks you face as an investor. You should definitely consider if you’re able to continue making hefty mortgage repayments, especially when coupled with a weak rental market.
Other loans that may also be affected include renovation loans, car loans, personal loans and credit cards interest rates. You should also consider repaying high-interest rate loans, which will only become more expensive.
# 2 Investments
As mentioned, for those who invest in properties, a rising interest rate environment, coupled with a weaker rental market, could see investors not being able to service their mortgages.
For the average investor on the street, rising interest rates will affect their real estate investment trust (REIT) investments most significantly. REITs tend to leverage highly in order to buy properties to lease out. A rising interest rate environment will impact their profits and distribution to unitholders.
Companies that are highly leveraged may also find business costs increasing significantly. This could also have adverse impacts on their profits and ultimately, dividends to shareholders. With more people having to cope with rising interest rates, it may also see them have less disposable income to spend. This could have a negative impact on sales for companies.
However, this should not mean you panic sell. The fundamental reason why the US is raising interest rates is because it believes the world’s economy is strong enough and ready to withstand it. This means that REITs or businesses should be able to cope with rising operational costs from improving operational profits.
Bonds will typically see an inverse correlation to interest rates. This means that a rising interest rate environment will likely mean declining prices in the bond market. This is primarily because bonds pay out fixed coupon rates, and the market now expects to receive a higher return for taking on the same level of risk.
# 3 Currency Rates
With interest rates set to rise in the US, the logic is that funds will flow into the country as it will earn a higher return there. In turn, this increased demand may likely lead to currency appreciation.
An appreciation in the US dollar will make it more expensive for us to travel to the US or purchase made-in-US products.
While it is true that the US Dollar has actually depreciated against the Singapore Dollar in the past year, looking further back shows as that it has actually appreciated in the past five years. The depreciation in the past year could have been down to several factors including stronger economic performance outside the US, which saw fund outflows as well as reactions from a Donald Trump presidency.
A strengthening US Dollar could mean more expensive holidays to the region for Singaporeans, as well as more expensive made-in-US products.
# 4 Consumer Products
As mentioned, a strengthening US Dollar will mean more expensive made-in-US products for Singaporeans. In fact, any goods that pass through the US will typically become more expensive.
Also mentioned above, consumers may have less spending power in a rising interest rate environment. This means they may purchase less products, especially discretionary items. This may force businesses to reduce prices.
In general, this kind of behaviour will dampen inflation levels. This means the price of goods and services may not rise as much as it used to under a low-interest rate environment, which fuels inflation levels.
What Should I Do?
What you definitely should not do is panic.
If you’re thinking that you’ll see higher interest rate returns on your savings, there’s really a low chance of that happening. You should already be able to achieve close to 2% to 3% in returns by using the right savings accounts. This is already much higher than what the US interest rates or SIBOR levels are at.
What you should do is work to pay off high-interest rate debt, that will gradually become heftier as interest rates climb.
Another thing you should note is that an increase in interest rates by the US is a signal that the world’s economy is healthy. This means you should not sell off your property or stock investments just because of it. What you should do is review your ability to keep up with mortgage payments and study whether the businesses you’ve invested into can cope with rising interest rates.
If you’re planning a trip to the US or buying a big-ticket item from the US, sooner might be better than later. Also, ponder if you need to make such big-ticket purchases that could have gone into your retirement nest egg.
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Bonds and Fixed Income