Tuesday 3 October 2023

Higher Interest Rates In Most Countries, But Surprisingly Singapore's Lending Rates Remain Unchanged. There could be a Reason Why

While news of US Fed & Europe Central Bank rate hikes have occurred (up 0.25%), strangely in Singapore, the key lending rate has not risen. The official lending benchmark Singapore uses is the 'Singapore Overnight Rate Average' (SORA) and this is how it looks pre and post announcements of rate hikes announced by other countries' central banks.

MAS's SORA (daily)

Does Singapore Interest Rates Follow Global Interest Rates

Contrary to what our school teaches that Singapore has an open economy with floating exchange rates etc, Singapore does not seem to conform to the unholy trinity of economics; in fact Singapore has been able to keep interest rates low while the rest of the world hikes interest rates.

The 3 month SORA rate has not moved up/down since July 2023.

Will it Last?

In my opinion, the suppressing of lending rates in Singapore is due to the high leverage of households owning properties. Most property loans are tied to the 3 month SORA rate and should SORA rates move up to the level's of US SOFR rate (5.25%) or Europe's (4.50%), the debt burden on Singapore household is tremendous. Magnitude wise, interest financing of Singapore properties could go up by 25% and this will impact both REITs and property speculators.

Hence my suspicion is that Singapore lending rates will continue to remain artificially low due to economic sorcery. 

The secondary effect is that the continuous low interest rates will ensure Singapore REITs are able to report low capitalisation rates (cap rates). As recap, a higher interest rates means REITs have to report lower property valuation. The US REITs suffered from this fate where the high interest rates caused their leverage ratio to go from low 30% to 45% level. 

Singapore REITs too face the danger of facing an elevated leverage ratios when Singapore interest rate rises, which could pull down the entire Singapore stock market as well as cause a credit crunch.

Personally, I am using this economic anomaly to borrow some loan in Singapore dollar and invest in overseas assets because the overseas risk free rate is so much higher than Singapore's. While this is not an adviced approach, it begs the question of why Singapore somehow keeps its interest rate low. My suspicion is that MAS seeks to protect overleveraged property speculators.

I have came across a blogger who mentioned we should not be a frog in the well and start to worry about high interest rates. However, in the well this frog lives in, it seems to be written as a fairytale by a pineapple god with lightning abilities.


  1. Borrowing in SGD to deposit in higher interest foreign currency will also be affected when fairytale in the well ends.
    The higher SGD interest then will cause SGD to go up vs the foreign currency so that even though higher interest but the lower value of foreign currency then will negate it.
    See YT documentary on this happening to Japanese housewifes (including when the fairytale crashed on them) on https://www.youtube.com/watch?v=PKVUD-Se7c8

  2. SG lending rates can be affected by factors such as:
    1) SG government bond/t-bill (risk-free) rates. If SG bond yield is high, banks will need a higher lending rates. Else, banks would choose to use their cash to buy t-bill/SGS bonds.

    2) Foreign government bond/t-bill (risk-free) rates and strength of SGD vis-a-vis foreign currencies. If Country A offer higher interest rates and its currency is strong, SG banks can use their cash to buy t-bill/bonds of Country A and lend less.

    3) Supply of money for loans. If foreign banks have more money to lend, their lending rates will be lower. If banks need higher interest rates for deposits, their lending rates will be higher. If banks are cautious in their economic outlook, their lending rates could be higher to compensate for the higher perceived lending risk.