MENU

Making Sense Of The Federal Reserve’s Latest Interest Rate Hike

The Federal Reserve, the central bank of the US, has raised benchmark interest rates in the country on Wednesday. The new range for the US’s benchmark interest rate would be 0.50% to 0.75% – it was previously at a range of 0.25% to 0.50%.

Investors in Singapore might wonder why changes in US interest rates might matter to them. Thing is, interest rates in Singapore are not controlled by the country’s central bank, the Monetary Authority of Singapore. Instead, interest rates here in Singapore are heavily influenced by what goes on in the US.

With that in mind, let’s take a look at the type of companies in Singapore that could be affected by the Federal Reserve’s latest interest rate hike:

1. Financial institutions

Singapore is home to some of the world’s strongest banks and they can be considered as beneficiaries of higher interest rates.

This is because Singapore’s banks make the majority of their revenue from net interest income. This net interest income is in turn affected by a bank’s net interest margin. The net interest margin measures the difference between the interest rate a bank charges when it lends out money and the interest rate that the bank’s depositors and lenders demand.

When the interest rate environment starts to climb, that’s when a bank’s net interest margin can expand.

2. Real estate investment trusts

A REIT’s business model is to borrow money to purchase properties from which it collects rental income. When an entity – be it a company, REIT, or individual – borrows money, it needs to pay interest on its loans.

Loans come in two varieties for REITs: Fixed-rate, or floating-rate.

A fixed-rate loan has a fixed interest rate for the duration of the loan; any change in the interest rate environment will not have any effect on the interest rate attached to the loan in question.

A floating-rate loan, on the other hand, is a loan with an interest rate that fluctuates with the interest rate environment; if benchmark interest rates start rising, it would increase the interest rate affixed to a floating-rate loan.

REITs in Singapore tend to have borrowings that are a mix of fixed-rate loans and floating-rate loans.

In conclusion, it can be said that the recent increase in interest rates by the Federal Reserve can be beneficial to some companies in Singapore and not to others.

For more investing insights and important updates about the share market, you can check out the Motley Fool's weekly investing newsletter Take Stock Singapore. This free newsletter can teach you how to grow your wealth in the years ahead, so do take a look here.

Also, like us on Facebook to follow our latest news and articles. The Motley Fool's purpose is to help the world invest, better.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.