Saturday, July 19, 2008

Why SIBOR is low

One reader came to ask me as to how SIBOR is affected. My answer to that question is the indirect relation to FED Funds rate in the US. I searched the internet on how the SIBOR is affected and the best source of explanation I can find is an article from Fundsupermart. You may want to read the whole article from the link I posted.

In a nutshell, some of the factors that may affect SIBOR are the following:
Level of liquidity (M2 Money Supply)
Strength of Singapore Dollar
Level of Inflation

The first factor is quite straight forward. If our country is flushed with excess liquidity, there is less incentive for banks to raise interest rate in order to attract investors. The second and third factors are directly related. We must understand that unlike in the US which makes use of Fed Funds rate to control growth and inflation, our country makes use of exchange rate to ensure price stability.

Due to high increase in the price of oil and commodities in the beginning of the year, MAS has allowed Singapore currency to appreciate in order to combat inflation. As our currency appreciates, it may have attracted more foreign investors to place their cash reserves in Singapore dollars. Thus the influx of monies may have caused liquidity here to increase further.

For a layman person, it may be difficult to understand the exact mechanism on how SIBOR changes in the short term. But if you look at the long term charts, you can see a close correlation between SIBOR and FED Funds rate except during the Asian Financial Crisis period in 1997. During that period, SIBOR had to be raised to induce greater liquidity in the financial market.

Long term chart of 3-month SIBOR

Long term chart of FED Funds rate

In my opinion, low SIBOR presents good opportunity for home owners to finance their mortgage at attractive rate. As the downside is already quite minimal, there is greater tendency for SIBOR to rise in future.


Paul Ho Kang Sang said...

Dear Mike,
Here is my view.

Low Sibor rate is a direct reflection of money available in the market on overnight basis, 1 month basis, 3 month basis and 1 year basis. Banks usually lend money to each other in such a market on a short term basis, but from time to time, I believe MAS or government statutory boards as well as GIC, Temasek also place money on a short term basis. As the market is shallow, compared to other markets, big players such as the Temasek or banks can release a lot of excess funds into Sibor thereby lowering the rates if the take-up is less than the funds being offered.

I've written something here, take a look.

Mike Dirnt said...

you got some nice analysis on your blog.

im in no position to say anything right or wrong about your views as im neither an economist nor an expert. :)

Paul Ho Kang Sang said...

I like your blog. It's got quite a few nice features. By the way, how do did you get the Real-time chat working?


Mike Dirnt said...


need to subscribe and pay. the free one has ads and not automatically refreshed.

come and join the discussion!

Guy Nicholson said...

SIBOR historical rates

SIBOR daily rates

Mike Dirnt said...

thanks nicholson,

for the direct links. i got my data from there