On 3 May 2023, the central bank of the United States, the Federal Reserve (the Fed), raised its benchmark interest rates by 25 basis points to a new target range of 5% to 5.25%. This is the 10th round of rate hikes in the last 14 months, which also has implications for our domestic interest rates.
Unlike the Fed, Singapore’s central bank, the Monetary Authority of Singapore (MAS), does not set interest rates. Instead, it adopts an exchange rate policy as its only monetary policy to maintain price stability. Hence, our local interest rates are largely influenced by global interest rates, which in turn takes reference to the US dollar as the world’s reserve currency.
One example where we can easily feel the repercussions of any change in US interest rates is in our home loan rates. Most floating rate packages are either pegged to the Singapore Overnight Rate Average (SORA) or, to a lesser extent, the Singapore Inter-bank Offered Rate (SIBOR).
Why Is The US Fed Raising Interest Rates
Inflation in the US soared to a 40-year high of 9.1% by June 2022 due to the large stimulus spending that the Fed carried out in 2020 to shore up the economy from the effects of COVID-19. To control the runaway inflation, it changed its monetary policy stance at the start of 2022 by becoming more hawkish after a decade of low interest rates of between 0% and 2.50%.
The first interest rate hike of 25 basis points was announced on 16 March 2022. Since then, the Fed has increased borrowing rates on 10 occasions, including the latest in May 2023, in the last 14 months to reach a range of between 5% and 5.25%. The Fed takes into consideration the health of the economy and the inflation rate – which it targets at 2% – among other data to determine the rate increases.
| Announcement Date | Initial Fed Borrowing Rate | New Fed Borrowing Rate | Rate Change |
| 16 March 2022 | 0-0.25 | 0.25-0.50 | 25 basis points |
| 4 May 2022 | 0.25-0.50 | 0.75-1.00 | 50 basis points |
| 15 June 2022 | 0.75-1.00 | 1.50-1.75 | 75 basis points |
| 27 July 2022 | 1.50-1.75 | 2.25-2.50 | 75 basis points |
| 21 Sep 2022 | 2.25-2.50 | 3.00-3.25 | 75 basis points |
| 2 Nov 2022 | 3.00-3.25 | 3.75-4.00 | 75 basis points |
| 14 Dec 2022 | 3.75-4.00 | 4.25-4.50 | 50 basis points |
| 01 Feb 2023 | 4.25-4.50 | 4.50-4.75 | 25 basis points |
| 22 Mar 2023 | 4.50-4.75 | 4.75-5.00 | 25 basis points |
| 3 May 2023 | 4.75-5.00 | 5.00-5.25 | 25 basis points |
What Is Singapore Overnight Rate Average (SORA)
As the once-popular Singapore Inter-bank Offered Rate (SIBOR) will be discontinued after 31 December 2024, most new home loan packages on floating rates are benchmarked to the SORA.
The SORA, which is measured over a compounded period of 1-month, 3-month, or 6-month, is considered a backward-looking interest rate. It uses the previous day’s borrowing transactions in the unsecured overnight interbank SGD cash market in Singapore between 8 am and 6.15 pm to determine the rate.
This is in contrast to the SIBOR, which is a forward-looking interest rate that is determined based on estimates from Singapore banks.
How Does The Change In US Interest Rate Affect The Singapore Overnight Rate Average (SORA)
The chart below looks at the SORA (1-month, 3-month, and 6-month compounded rates) and the US Effective Federal Funds Rate (EFFR) over the last 14 months.
From the charts, we can observe that though the EFFR influences the SORA in an overall upward direction, there is no sudden spike whenever the Fed changes the rate. This is one of the benefits of SORA, as it gives borrowers more stability compared to forward-looking rates like the SIBOR, which is exposed to market factors on a single day.
Furthermore, while the SORA tracks the EFFR closely, it does not always move in equal measure, especially since November 2022. Among the SORA rates, the 1-month compounded SORA is also more volatile than the 3-month and 6-month compounded SORA. This is why the 3-month SORA is more widely used as a benchmark by banks for their floating rate packages.
To further understand the difference in the SORA rates whenever the Fed changes the interest rates, we compute the SORA on three dates: one day before the announcement, the announcement date, and one after the announcement.
| US Fed Interest Rate Announcement Date* | SORA (1 Days Before Announcement) | SORA (On the Date Of Announcement) | SORA (1 Days After Announcement) |
| 16 March 2022 | 0.226 | 0.308 | 0.430 |
| 4 May 2022 | 0.676 | 0.473 | 1.054 |
| 15 June 2022 | 0.575 | 0.398 | 0.992 |
| 27 July 2022 | 1.691 | 1.526 | 1.752 |
| 21 Sep 2022 | 1.674 | 1.623 | 2.531 |
| 2 Nov 2022 | 2.598 | 2.647 | 2.897 |
| 14 Dec 2022 | 2.054 | 1.646 | 1.758 |
| 01 Feb 2023 | 3.869 | 3.568 | 3.429 |
| 22 Mar 2023 | 3.889 | 3.718 | 3.551 |
| 3 May 2023 | 3.720 | 3.618 | 3.269 |
*Rates are taken one day after the US announcement to factor for the time difference.
Notable Observations:
– From the table above, we can observe that on only 2 out of 10 occasions, the SORA was lower the day before the announcement date. This could indicate that the market tends to price in the expectation of a future rate increase.
– Typically, the rates changed about 10 basis points to 40 basis points on the date of announcement compared to the prior day.
– The SORA rose higher one day after the announcement date on 7 out of 10 occasions by around 10 basis points to as much as 90 basis points.
– The other 3 occasions where the SORA decreased a day after the announcement have all been in 2023, when rates were lower by around 10 basis points to 40 basis points.
How Does This Affect Your Singapore Home Loan
The recent rise in US interest rates is an indicator of higher home loan rates in Singapore, especially if you are on a floating-rate package that is benchmarked against the SORA. While we may not be able to predict whether the Fed will pause or continue with its rate hike in the next FOMC meetings, we can expect the rates to remain high as long as the economy is expanding and inflation continues to be well above the Fed’s target of 2%.
One way to reduce the uncertainty is to switch to a fixed rate package, which locks in the interest rate for 2 to 3 years. Though this might be slightly higher than current floating rates, it gives you better visibility on your loan obligations in the near term.
That said, there might be other suitable options, like repaying your loans or refinancing to get a better rate. For that, you could use a good, trusted broker like our friends at RedBrick, who can give you peace of mind, knowing that you will always get the best rates out there and enjoy unparalleled service.
The best part? The service is free for you since brokers like them receive their commissions from the banks. Whether you want the best loan rate or just someone to walk you through the process, feel free to get a non-obligatory quote and consultation.
Simply fill out the contact form and an experienced Redbrick mortgage specialist will be in touch with you for a non-obligatory consultation.
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