http://www.businesstimes.com.sg/sub/...83940,00.html?

Published August 19, 2011

No need for action amid negative SOR: MAS

By TEH SHI NING


(SINGAPORE) Singapore's domestic money markets continue to function in an orderly manner, and there has been no need for 'extraordinary measures', the Monetary Authority of Singapore said yesterday, in response to media queries on the fall of the Singapore dollar swap offer rate (SOR) into unprecedented negative territory last week.

All but the one-month SORs yesterday remained under zero, though the six-month SOR was the only one to slip. The three-month SOR climbed slightly to -0.17152, while the six-month SOR fell to -0.63274. Both were up from last week's lows of -0.6987 and -0.99258 respectively.

In yesterday's statement, the MAS reiterated that interest rates here are determined by the market, and that its current monetary policy stance, of a gradual appreciation of the Singapore dollar against a trade-weighted basket of currencies, 'remains appropriate'.

'Given the economy's openness to capital flows, domestic interest rates are strongly influenced by global liquidity conditions,' said the MAS. And Singapore's interest rates have been low for some time due to historically low global interest rates, as major economies maintain loose monetary policies in the face of weak economic recovery. For instance, the US Federal Reserve recently pledged to keep its policy rate close to zero till mid-2013.

Recently, 'volatility in global financial market has caused some investors to seek the safety of short-term cash deposit', the MAS said. Safe-haven inflows into AAA-rated Singapore have been most evident in the forward markets. As the SOR is a derived cost of borrowing Singapore dollars, it has turned negative due to expectations of continued Sing dollar appreciation against the greenback.

An OCBC Treasury Research report yesterday said that there have been 'unsubstantiated market rumours' that the central bank did not fully intervene to mop up excess liquidity. 'But it is highly unlikely that an excessively low interest rate policy is being engineered here to support growth or re-inflate the economy, as central bank independence and credibility is at stake,' said OCBC.

As many businesses and mortgage loans are pegged to SOR, the anomalous negative SORs last week prompted banks to invoke market disruption clauses. These clauses allow the renegotiation of loans to reset interest rates to the cost of funds or the Singapore Interbank Offered Rate instead. The SIBOR too, has slipped, but remains in positive territory.

MAS said that the next monetary policy statement will be released as scheduled in mid-October.