Fed raises key interest rate – SG homeowners expect to pay more interests for mortgages

The US Federal Reserve raised the key interest rate to a new range of 1.75-2.0 percent on Wed (13 Jun). The Fed now dropped its pledge to keep rates low enough to stimulate the economy “for some time”.

This is the second increase of the year with 2 more hikes likely to come before the end of the year and another 4 next year. So far, this is the 7th time the Fed has raised the interest rates since Dec 2015.

The median forecast of members of the Fed's rate-setting Federal Open Market Committee puts the benchmark at 3.1 percent at the end of 2019, up from the previous 2.9 percent, which implies having four hikes next year rather than three.

Most economists had not expected the Fed to give a clear sign that an additional rate increase was likely until later in the year.

The Fed said that "further gradual increases" in the key rate "will be consistent with sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric two percent objective over the medium term."

In its quarterly Summary of Economic Projections, officials projected the Fed's preferred inflation measure will accelerate only slightly, ending this year at 2.1 percent rather than 1.9 percent, and holding at that level through 2020.

That index currently is at two percent, but other measures of consumer and producer prices have accelerated, pushed by rising fuel prices, as well as metals prices that could be the result of the steep import tariffs President Donald Trump imposed.

Higher inflation rate would usually trigger the Fed to up its key interest rate.

Impact on Singapore

Fed's raising of its key interest rate has major consequences for Singapore given how closely rates here align with those in the US. Higher US rates mean higher rates in Singapore on mortgages, credit cards and corporate loans.

Maybank Kim Eng economist Chua Hak Bin said, "Singapore's short-term interest rates are going to climb, which could impact property market sentiment as well as companies that are highly-geared."

"Rates are still relatively low and not likely to bite that much. When the Fed funds rate approaches 3 per cent in late-2019, Singaporeans might feel it a bit more," he added.

Higher US rates may also spark big capital outflows out from the region looking for better returns. That in turn could put pressure on Asian currencies and asset markets in the region.

Societe Generale said in a note, "Cheap money has fuelled a rise in global debt levels and a fall in the cost of funding for many economies, both developed and emerging, in recent years. Weaning the global economy off that cheap funding, without causing undue market turmoil, will be a delicate process that probably sees some currencies fall sharply."

According to investingnote.com, those homeowners who have been enjoying the promotional fixed-rate packages in the last couple of years, could see their home mortgages increase by close to 1.0% when they come out of the fixed rate to the present floating mortgage rate.

It is estimated that a 30 basis points increase in interest rate for a S$1 million loan will translate to an additional S$144 monthly. So, a 1.0% hike can easily mean paying close to an additional $500 a month in mortgage.