What the Fed’s latest big rate hike mean for Singapore
SINGAPORE: Stock and bond prices plunged and the US dollar rallied as the Federal Reserve (Fed) raised its benchmark rate to the highest level in 14 years to crush surging inflation.
The US central bank raised the Fed funds rate by 75 basis points, or 0.75 percentage point, on Wednesday to a new target range of 3% to 3.25% – the highest since 2008.
The Singapore dollar is not immune, with the latest Fed rate hike sending the local currency down nearly 2% to 1.4199 per dollar yesterday.
The dollar is also the dominant currency for foreign trade and investment transactions worldwide. For instance, about 70% of all foreign transactions, including trade, in Singapore are conducted in dollars.
Unlike other central banks, the Monetary Authority of Singapore (MAS) fights inflation – the pace of change in prices – by managing the country’s exchange rate against its major trading partners.
The choice of using the Singapore dollar as a main tool to achieve price stability comes from the republic’s dependence on imports, which makes it vulnerable to imported inflation.
MAS has tightened its policy stance four times since October 2021, pushing the Singdollar up against the currencies of virtually every trading partner except the dollar.
However, interest rates in Singapore move in tandem with global moves in rates led by the Fed.
Interest rates on loans, including mortgages and car leases, have been on the rise this year. The latest Fed rate hike will mean loans will become even more expensive.
The increase in Fed rate will be reflected by the overnight interbank Singapore dollar cash market. The benchmark one-month Singapore Overnight Rate Average, or Sora, used to price home loans, rose from 0.1174% in October 2021 – when MAS began its tightening cycle - to 2.0737% on Wednesday.
However, MAS can choose to manage local rates by influencing the availability of Singapore dollars in the interbank money market here, with the aim of preventing wild swings in the cost of borrowing.