SINGAPORE: Singapore's benchmark three-month interest rate rose above 1 percent for the first time in more than six years on Tuesday, reflecting tighter conditions in the domestic money market and recent weakness in the Singapore dollar.
The three-month Singapore interbank offered rate (Sibor), which is used to set floating-rate mortgages, rose to 1.00129 percent, its highest level since December 2008.
A softer Singapore dollar can put upward pressure on local interest rates as investors seek higher yields as compensation for holding the weakening currency.
The U.S. dollar has been bolstered by expectations the Federal Reserve will raise interest rates later this year, while the Singapore dollar has come under pressure after the Monetary Authority of Singapore (MAS) unexpectedly reduced the upward slope of its policy band in late January.
The Singapore dollar fell as low as 1.3938 versus the U.S. dollar earlier this month, the weakest level since July 2010. It has since pulled up from that trough, but is still down roughly 3 percent this year.
The MAS manages monetary policy by letting the Singapore dollar rise or fall against the currencies of its main trading partners within an undisclosed trading band based on its nominal effective exchange rate (NEER).
Suspected central bank intervention to support the Singapore dollar may be another contributory factor, analysts say.
The rise in Sibor has been driven by tighter domestic liquidity conditions stemming from such intervention, said Andy Ji, Asian currency strategist for Commonwealth Bank of Australia.
"Following the inter-meeting surprise, the Singapore dollar NEER slumped to the bottom of its policy band, obliging the central bank to intervene with supplying U.S. dollars. This in turn withdraws Singapore dollar liquidity which is not fully sterilised," Ji said.
A slower pace of deposit growth relative to loan growth is also keeping money market conditions tight, analysts say.
MAS data shows Singapore dollar deposits held by non-bank customers rose 1.1 percent from a year earlier to S$543 billion as of January, while bank loans rose 4.3 percent to S$607.5 billion.
"Incremental deposit growth is much lower than incremental loan growth ... This will keep money markets tight," Kumar Rachapudi, senior rates strategist for ANZ in Singapore, said in a research note.
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