SOR and SIBOR

SOR (Singapore Swap Offered Rate) dropped to an unprecedented negative rate on 11 Aug. Normally, SOR tracks the SIBOR (Singapore Interbank rate) very closely. Nevertheless, right after US Federal Reserve committed to keep US interest rate at record low level for the next 2 years, more USD came flooding into Singapore. Investors are swapping USD for SGD at a negative rate because we are still AAA rated and they expect SGD to appreciate further. This caused SOR to deviate from SIBOR and drop below zero. How long can this continue on?

Given our open and small economy, Singapore central bank can only make use of exchange rate as the only effective monetary policy. They have no or little control over the domestic interest rate. The SGD has gone up for quite a lot over the last 2 years. This is already hurting our manufacturing sector. Soon, the strong currency may even affect the tourism sector. Though a strong SGD may keep inflationary pressure at bay, it will not have any overwhelming effect on our CPI or inflation rate if property prices and COE keep going up. Instead, the new housing policies should have dampening effects on the escalating home prices. If not, I think the negative sentiment in the stock market should do the job.

Going forward, a few things may cause volatility in SIBOR and SOR. If banks are failing because of the European debt crisis and this creates a liquidity squeeze, SIBOR and SOR should fluctuate upwards just like what they did during the last crisis in 2008/2009. The outlook of the USD/SGD exchange rate will also dictate the direction of the SIBOR and SOR in the coming future. Anyway, the rates are already close to zero or below zero. How low can it go? Common sense tells me that it can hardly go down any further.


Disclaimer: The content in this blog contains purely my personal opinion and it is in no way a substitute for professional financial advice. You should seek advice from a professional financial advisor with any question regarding your financial matters.