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How Would the U.S. Federal Reserve’s Change of Interest Rates Affect Singapore?

Last Wednesday (18 March 2015), all eyes were on the Federal Open Market Committee (FOMC)’s review of the U.S. Federal Reserve’s monetary policy.

According to the Federal Reserve’s press release on the meeting, the U.S. economy is picking up steam with a lower unemployment rate, higher household spending, and increased business spending.

But, the FOMC is in no immediate hurry to push up the Fed Funds rate yet as it cites subdued economic growth and lower inflation projections going forward.

On the other hand, there’s still a real chance that a hike in interest rates may happen in the next few months. As a Reuters article noted last week, Atlanta Federal Reserve President Dennis Lockhart “expects the U.S. central bank to raise interest rates at either its June, July or September policy meetings, barring a significant downturn in the U.S. economy.”

While there’s no guarantee that the Federal Reserve will raise interest rates by the end of this year, let’s assume it will do so and take a look at some of the possible spill-over effects that move will have on Singapore.

Impact of a rising interest rate environment for Singapore

As you can see in the chart below, the Fed Funds rate and Singapore’s 3-month Singapore Interbank Offer Rate (an important interest rate benchmark in Singapore that many housing loans are pegged to) has had a high correlation of 86% over the past 27 years.

With the Fed Funds rate now at historic lows, there’s a good chance that the SIBOR can spike up if and when the Federal Reserve raises interest rates.

As it stands, the 3-month SIBOR has already been increasing lately with Channel News Asia reporting two Fridays ago that the interest rate benchmark has “charged past 0.9 per cent – a level not seen since 2008 – amid widespread expectations that the United States Federal Reserve will raise benchmark borrowing costs [the Fed funds rate] by mid-year.”

Fed-Funds-Rate-and-3-month-SIBOR

Source: singaporepropertycycle.com.sg

With the SIBOR having the potential to climb even higher, one industry that may witness a significant impact is real estate, in particular property developers and real estate investment trusts.

Rising mortgage rates will likely have an adverse effect on demand for private residential housing. This in turn will weigh down on the business of property developers which conduct significant business in Singapore, such as GuocoLand Limited (SGX: F17) and Heeton Holdings Limited (SGX: 5DP).

As for the REITs, a rise in the general interest rate environment may result in higher interest payments on their borrowings, potentially lowering their profitability and distributions per unit in the future.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.