WHY IS SIBOR FALLING DESPITE RECORD INFLATION (CPI)

quote: "Success is a thought process"

I have 1 question. Why is Sibor (Interbank borrowing rate) falling despite record inflation?

In Singapore, Sibor is set by the Association of Bankers (ABS). As this is a closed group, I can only surmise that the Sibor Rate is set after banks consult each other and after considering the amount of liquidity available.

In the US, the federal reserve set target interest rates to regulate the economy, But in Singapore, the Monetary Authority of Singapore regulate the foreign exchange against an undisclosed basket of currencies of it's biggest trading partners, in order to control Inflation.

However Interest rates are usually set by banks and the government has a say in the direction of the interest rates, though it is thought to be implicit.

SUCKING UP EXCESS LIQUIDITY: BUT TARGETED INDISCRIMINATELY AT POOR AND MIDDLE-INCOME
With M1 money supply at a historic high, CORE inflation is a natural by-product (housing, ERP, bus fares, SMRT increase, food prices, etc). Adding fuel to fire is the additional inflation caused directly by fuel and resources. So in a sadistic way, the Singapore government has to increase indirect taxes to suck up the liquidity. However the scary thing is, this M1 nett increase is not spread out equally, that means that the Government's indiscriminate and across the board increase hits the poor and the middle-income hardest.

Normally, you would expect that any government should increase the interest rates when inflation is high, so as to slow down economic activity. In Singapore's case, where we import many items, therefore keeping the currency strong reduces inflation.

FORWARD LOOKING: INFLATION TO SOFTEN???
Of late, the USD vs SGD has seen an increasing trend (meaning that USD is stronger vs SGD), this in fact is a devaluation of the Singapore Dollar vs USD (of course this is only versus 1 currency). But this could signify that the Singapore Government views inflation ahead as benign.

If you look at SIBOR, it has also come down dramatically to below 2% for 1 year Inter-bank rate. Surely this cannot be right in an Inflation year??? Usually SIBOR comes down when there is an impending or risk of recession and in any economy, there is a lag effect of at least 6 months or more.

POSSIBLE IMPACT
When the currency trend is established or expected to weaken, smart money is the first to leave the currency. On top of that SIBOR is set to be reduced, this means that some other money parked in Singapore money market may deem the reduced yield too low and leave Singapore in search of higher yield.

But on the other hand, lower SIBOR keeps housing financing affordable. Some property developments in areas such as District 9 and District 10 has up to 40% to 50% foreign ownership. If they are NOT all here to stay but instead buying for investment, lower SIBOR will keep these people from cashing out of the Singapore market (There will be trouble even if foreign owner drops by 10% as that would mean increased selling pressure in an already bearish market). It is highly unlikely that such investors (many from Indonesia, Malaysia, China, India, etc) will keep the money from the sales proceeds in Singapore currency given that their home country deposit interest rates are higher.

As long as property prices stay fairly stable or drop in an orderly manner and gradually, Singapore can ride out the economic trough.


PROGNOSIS
In other words, lowering SIBOR is a calculated gamble to stabilise the property market and ensure an orderly fall (governed by supply and demand) and not panic selling. Although there is a risk of flight of some foreign capital from Singapore, those are potentially lesser evil considering that the property sector is a big sector in Singapore.

Many economic and policy tools are already activated to mitigate the severity of the coming slow-down or recession. So sit tight...

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