SINGAPORE, July 28 — Economists in Singapore largely expect interest rates here to plateau soon even though the United States central bank has just raised its benchmark lending rate to the highest level since 2001 after a pause in its anti-inflation campaign last month.

The increase of 25 basis points or a quarter of a percentage point announced by the US Federal Reserve on Wednesday brings the Fed’s key lending rate to between 5.25 per cent and 5.5 per cent.

Singapore interest rates are not set by the central bank here, and tend to broadly follow trends set in global money markets, especially that of the US, the world’s largest economy.

Interest rates affect the cost of borrowing money for a range of purposes including buying homes and cars. Businesses also borrow money to expand their operations, for example.

Over recent months, some non-fixed mortgage rates here have climbed to their highest level in years. While borrowers have been squeezed, savers have enjoyed the upside of higher interest rates, as deposit rates increased.

At its previous meeting in June, the Fed paused its rate-rising campaign following 10 consecutive hikes which began in March 2022. The Fed meets eight times a year.

Central banks raise interest rates to make borrowing more expensive to try to slow down economic activity as a way to reduce inflation, which has been persistently high in many parts of the world over the past year or so.

Fed’s pause in June reflected ‘cautious’ stance

OCBC’s head of treasury research and strategy Selena Ling said that while the US inflation rate has stayed above the 2 per cent rate targeted by the Fed, the central bank’s decision to pause the rate hike in June could be attributed to them taking "a more cautious stance”.

Fed chair Jerome Powell in June said the decision was made "in light of how far we’ve come in tightening policy, the uncertain lags with which monetary policy affects the economy, and potential headwinds from credit tightening”.

UOB senior economist Alvin Liew in a note last month said Powell had stated that the Fed was "stretching out to a more moderate pace of hiking”.

Liew correctly anticipated that this comment, along with signs that US prices were still elevated, meant the Fed would resume raising rates.

Independent economist Song Seng Wun said that as with all past meetings, the Feds must have reviewed the latest numbers before deciding on the hike in July.

"It’s a case of enough evidence that although things have cooled a little bit, they’re not cooling down as fast as what the Fed would like to see,” he said.

US rates tend to impact Singapore rates

The Monetary Authority of Singapore (MAS) manages monetary policy by adjusting exchange rate settings, rather than through setting interest rates as many other central banks do.

Economists have previously told TODAY that interest rates in Singapore roughly track those set by the US central bank.

"Sora, which is used as a benchmark for various loans including home loans, is also partly influenced by US interest rate outcomes,” said Liew from UOB, referring to the Singapore Overnight Rate Average.

"Therefore, we expect Sora rates to remain at around their recent levels until the end of the year.”

In Singapore, some mortgage rates, for example, are pegged to benchmarks such as Sora.

Asked if the recent hike in July would mean a hike in rates here, OCBC’s Ling said that "there may be some upside risk”.

Song told TODAY: "It is not a direct one-for-one relation, but Singapore interest rates track US rates.

"Simply put, higher US rates, higher Singapore rates. Lower US rates, lower Singapore rates,” he said.

Interest rates for Singapore borrowers are ‘close to peak’

Powell on Wednesday said that the "process of getting inflation back down to 2 per cent has a long way to go”.

However, asked about future moves, he said that the Fed was taking it "meeting by meeting” though some US media outlets said Powell hinted at possible further rate rises down the track.

Economists here largely agreed that the rates are nearing a plateau, if they have not reached one already.

In a note issued on Thursday, DBS chief economist Taimur Baig said that rate hikes are "all but done”.

"Examining the data flow on economic activity, consumer and business confidence, labour market, and financial market conditions, we think the Fed has reached the point for a prolonged period of wait and watch that can last through the middle of next year,” said Baig.

OCBC’s Ling said: "The bar for a subsequent hike in September is high in my view, as both inflation and growth will slow down.”

The Fed’s remaining three meetings this year are scheduled for September, October and December.

Liew of UOB told TODAY that his team expects the Fed policy rate to peak at 5.5 per cent in 2023 "and stay on pause for the rest of this year”.

"We expect Fed rate cuts in 2024, so the Sora will fall in lockstep,” he added.

Meanwhile, Song said that "global interest rates may be near to peaking out”.

"But it doesn’t look like any of them (central banks) — or the key ones — are in any way in a position to cut rates because there are no signs of recession conditions emerging,” he said.

"For Singapore borrowers, make sure that you can service loans on that higher interest rates, because that interest rate may not be cut anytime soon.” — TODAY