MANY Singaporeans probably didn't pay more than cursory attention four days ago to news that the United States Federal Reserve had decided not to increase interest rates.
But they should have: It could affect their pockets.
The Fed funds rate - the rate that American banks charge each other for overnight loans - had been raised 17 consecutive times over the past two years.
It had been jacked up from historic lows to 5.25 per cent to combat inflation.
For trade and foreign currency reasons, there is a close link between the direction of interest rates in Singapore and those in the US, say experts.
To begin with, the interbank rate here - the rate at which banks here lend to and borrow from each other - lags the Fed funds rate.
The Singapore six-month interbank rate has lagged by 1.5 to 1.75 percentage points, says Mr Tan Chia Seng, Citibank Singapore's business director for secured assets.
'If the Fed ends its rate hikes, then Singapore interbank rates might start to ease off too,' he says.
That's the good news, but of course, the Fed is not the only factor affecting the trend in Singapore rates.
Mr Tan says that the extent of any levelling off or even easing of rates here is uncertain given the strong Singapore economy, which translates into demand for loans.
Says Mr Kevin Lam, who heads the loans division at United Overseas Bank (UOB): 'We don't see a drop in the interbank rates before the end of the year.'
What does this mean for you if you have a home loan to pay off?
Home loans
THERE'S a wide range of views, but chances are, interest rates for mortgages will rise further - but at nowhere near the alarming rate that they have in the past year.
Mr Lam of UOB says that mortgage rates typically lag increases in the cost of funds.
'There are some who are of the view there will be more mortgage increases before the end of the year,' he says.
OCBC treasury economist Selena Ling notes that the property market is recovering and banks are enjoying growth in loans, so interest rates 'may not fall in the near term but could stabilise as players adopt a wait-and-see attitude'.
Associate Professor Annie Koh, an associate dean of the Lee Kong Chian School of Business at the Singapore Management University, is more optimistic - at least for the near term.
'Banks are not likely to raise rates further, given the slowdown as a result of two consecutive Hungry Ghost months in August and September,' she says.
A turning point might come early next year, when the Fed is widely expected to start lowering interest rates.
In a note to clients, UBS Wealth Management says: 'Investors have focused much attention on the US Fed interest rate decision on Aug 8.
'However, we think they are missing a key piece of the puzzle - the potential for rate cuts in six months' time.'
A downturn in the interest rate cycle would benefit home owners who hold floating-rate mortgages since these rates will turn down too.
Mr Tan of Citibank says floating interest rates would be of particular interest to home owners who intend to hold their property for very short periods.
Floating rates are currently lower than fixed rates, and their lock-in period is also shorter.
However, many home owners have been stressed by the pace of interest rate increases over the past two years, and might be inclined to opt for the certainty afforded by fixed rates.
For them, Mr Tan says there are packages that pay out cash bonuses to home owners should rates fall.
An example: the Citibank package launched last September that locked the interest rate in at 3.85 per cent a year for five years.
Customers will receive bonus payouts if the six-month Singapore interbank rate falls below 1.75 per cent. It has some way to go - it is now around 3.5 per cent.
Car buyers, especially, would be happy to see interest rates for car loans come down from their lofty levels of between 6.4 per cent and 7.8 per cent a year currently.
The rate varies depending on whether the car is a new or used one, and on the length of the loan repayment period.
Fixed deposits
THOSE who are holding cash, not borrowing it, have benefited from the rise in interest rates for fixed deposits during the past year. This rise has brought cheer to retirees in particular, as they keep the bulk of their nest eggs in such accounts.
But don't expect these rates to jump much more, just as you wouldn't expect mortgage rates to rocket up.
'It's likely there will be much less steam left in future increases in fixed deposit rates,' says Mr Tay Han Chong, UOB's head of deposits, investment and insurance strategy.
'Rates may increase a bit more but at a much slower pace.'
Says Standard Chartered Bank's general manager for wealth management, Mr Dennis Khoo: 'Interest rates have risen significantly since late last year. This may be among the most opportune times to go for longer tenures and lock in funds at attractive rates.'
That makes sense to Prof Koh, who advises: 'Investors should go for tenures of six or nine months.'
What about tenures of 12 months and longer?
'No, I'll not recommend that because if interest rates start to ease after the turn of the new year, you should switch to bonds at that point in time,' she says.
Bonds pay a fixed yield, so if you buy into them when interest rates are at their peak, you are locking in high yields before interest rates tumble.
The presumed end of the interest rate tightening cycle by the US Fed should be very positive for Asian local currency bond markets, says Ms Rachana Mehta, a senior portfolio manager at DBS Asset Management.
'Asian currencies should strengthen against the US dollar and that will provide further positive impetus for the bond markets.'
Singapore stocks
INTEREST rates are but one of several factors that can influence stock prices.
Basically, rising interest rates mean higher borrowing costs for companies that have loans to pay off.
These growing costs in turn eat into their profits, and eventually bring down the prices of their stocks. Property developers are among those vulnerable to high interest rates as they tend to have large borrowings.
Says Ms Carmen Lee, the head of OCBC Investment Research: 'Recently, we saw concern over high interest rates taking the shine off local property stocks.'
In contrast, banking stocks are beneficiaries. The surge in the three-month interbank rate is also likely to be positive for banks, especially DBS with its large deposit base, she says.
Ms Lee notes that, traditionally, high interest rates tend to draw investors away from equities.
Currently, the Straits Times Index stocks are offering an average yield of only 3.6 per cent a year, she adds.
Previously, when interest rates were low, stocks were attractive for both potential capital gains and higher dividends yields as compared with fixed-deposit rates.
Mr Lim Chi Teong, a senior portfolio manager at DBS Asset Management, says the presumed end of the US interest rate tightening cycle should boost equity markets, including Singapore's.
The ending has been widely anticipated and speculated about, and should therefore be partially discounted.
'It is partially - not fully - discounted due to differing views in the market and uncertainties among investors on the direction of US monetary policy under a new Fed chairman,' Mr Lim says.
Real estate investment trusts (Reits) have also lost their shine because their yields have been eclipsed by rising fixed deposit rates.
Thus, Reits - investment vehicles that own mainly commercial and industrial property - would benefit from a fall in interest rates.
In the current market, says Mr Lim, they would become more attractive to investors for another reason: Rentals are rising.
UBS Wealth Management Research has studied the response of 10 Asian markets during the three US interest rate cycles of the past 20 years.
It says: 'Singapore's equity market tended to do well both after the US Fed stopped raising rates and before it started cutting rates.
'This supports our 'overweight' call on Singapore's market. If the Middle East geopolitical situation deteriorates and the US economy slows, Singapore's market should be less volatile than other Asian markets.'
UBS found that, on average, Asian markets rose 3 per cent to 8 per cent between two and 12 months after the last US rate hike in each cycle.
chanteik@sph.com.sg
More stable trend as markets recover
'Interest rates may not fall in the near term but could stabilise as players adopt a wait-and-see attitude.'
MS LING, of OCBC, noting that the property market is recovering and banks are enjoying growth in loans
Fixed deposits likely to lose steam
'It's likely there will be much less steam left in future increases in fixed deposit rates. Rates may increase a bit more but at a much slower pace.'
MR TAY, of UOB
Mortgages reined in by Hungry Ghosts
'Banks are not likely to raise mortgage rates further, given the slowdown as a result of two consecutive Hungry Ghost months in August and September.'
PROF KOH, of SMU
