Target range: People take pictures on the boardwalk at Marina Bay in Singapore. Interest rates here take their cue from the US money market because the MAS uses the local dollar to pursue its goal of medium-term price stability. — AFP
SINGAPORE: A bigger-than-expected cut by the US Federal Reserve (Fed) may have given the impression that the interest rates on home and car loans here will rapidly fall to lows seen before the Covid-19 lockdowns.
US policymakers and some private economists believe that the world’s largest economy is in a new cycle, where low inflation, low growth and high unemployment are things of the past.
Relatively high interest rates will be a feature of this new cycle, and the rest of the world will have to adjust accordingly, analysts said.
Perhaps to underscore this remarkable phase the US economy is entering, the world’s most influential central bank decided to kick-start it with a bang.
It reduced the target range of its key Fed funds rate (FFR) by 50 percentage points to 4.75% to 5% on Sept 18 – the first rate cut in two years.
The move was larger than the 25-basis point cut most Wall Street banks were expecting.
The Fed plans to execute more cuts in 2024, 2025 and 2026, and has expressed confidence that inflation will continue to decline.
It instead stressed the need for lower rates to buttress the labour market as unemployment rebounded in August to 4.2%, up from 3.8%t in the same month of 2023. The median of its own projections showed that the FFR will drop to 4.4% by the end of 2024 and to 3.4% by the close of 2025.
For 2026, the Fed’s median FFR estimate is at 2.9%. That rate is well above the range of 1.5% to 1.75% set by the Fed in October 2019 in its last meeting before it began emergency rate cuts in March 2020 amid the onset of the lockdown induced recession.
Interest rates here take their cue from the US money market and treasury bond yields, because the Monetary Authority of Singapore (MAS) uses the local dollar to pursue its goal of medium-term price stability, instead of setting interest rates.
Analysts estimated the key mortgage pricing benchmark – the Singapore Overnight Rate Average (Sora) – is likely to end the year just under 3.5%, compared with the 2024 peak of 3.8%.
Sora may ease closer to 2% in 2025, about a full percentage point higher than the tight range of around 1% that prevailed in most of 2019.
That 1% difference may not sound much, but the compound impact over a 30-year mortgage means home buyers may have to fork out more money than before to pay back the loan.
Eugene Leow, DBS Bank’s head of fixed income research, said that unless the US economy slips into a deep recession, the FFR will not go below 3%.
He added that low interest rates were a legacy of the 2008 global financial crisis and the 2020 lockdown-induced recession.
He said “that was a period where inflation was practically non-existent.
“In the current environment, even as cyclical inflation has eased, the prospects of shocks and trade frictions suggest that inflation may be structurally higher.
“Accordingly, a revisit of the very low rates seen pre-pandemic appears unlikely.”
Central banks and international agencies such as the International Monetary Fund believe cost pressures will remain elevated globally, particularly in high-income economies such as Singapore, amid ageing populations and declining labour supply.
A MAS report in April said import prices could rise as Singapore’s trading partners grapple with supply issues.
It also noted that there were costs associated with geo-economic fragmentation – a reference to the US-China trade war and a rise in protectionism – as companies navigate disruptions to their supply chains by diversifying and establishing new and more costly input sources.
“Meanwhile, climate change action also entails large public and private sector investments to facilitate the energy transition, which will eventually translate to higher input prices,” the MAS said.
Joey Chew, Singapore-based head of Asia FX research at HSBC, said global monetary policy is unlikely to go back to the highly accommodative stance of pre-lockdown times given there are now more upside risks to global inflation. — The Straits Times/ANN
