Sibor rates may go up after Fed rate hike

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US Federal Reserve raises interest rates

Regional markets declined and the US dollar weakened after the United States Federal Reserve made a widely anticipated move to raise interest rates overnight.

The decision by the Fed to hike rates by 25 basis points to a range of 1.25 to 1.5 per cent came as the central bank said it expects faster economic growth and lower unemployment in the US next year.

This is the third time this year that the Fed has raised rates, and the fifth since it slashed the rate to nearly zero during the financial crisis of 2008 and 2009.

Mr Greg McKenna, chief market strategist at AxiTrader, told Agence France-Presse the reaction suggests investors "don't believe the Fed's outlook nor its rate projections".

The sticking point in the Fed's outlook is inflation, which has continued to fall short of the central bank's 2 per cent target.

In its Wednesday statement, the Fed's so-called "dot plot" of interest rate projections showed the median forecast was for three rate rises next year.

IG market strategist Pan Jingyi said the weak inflation is fuelling market doubt over the Fed's ability to hike rates that much next year.

CMC Markets analyst Margaret Yang said the regional malaise was likely due not to the Fed but to the People's Bank of China (PBOC).

"The PBOC unexpectedly raised interest rates just a few hours after the Fed did. I think the Hong Kong and China markets in particular are shocked by this action," she said.

"Although the magnitude of the hike was not big, it sent a signal that China would follow the Fed's path of tightening monetary policy."

The global move towards a normalisation of interest rates will have its trickle-down effect here eventually, economists said.

Still, Mizuho Bank senior economist Vishnu Varathan said the Fed's rate hike transmission to the Singapore interbank offered rate may also be partly dampened by Singdollar appreciation expectations, which have already muted the pick-up in the swop offered rate.

"Nonetheless, the trend of rising interest rates is unlikely to be reversed in the coming years and as such, mortgage servicing burden is expected to grow at the margin," he added.

United Overseas Bank economist Alvin Liew said: "After hugging the zero line for the past few years, global money market rates are now responding to the growing normalisation of monetary policy and have started to head higher."