How Does the Fed Interest Rate Cut Affect Borrowers in Singapore

The U.S Federal Reserve has implemented the first in an expected series of interest rate cuts. What impact will this widely anticipated event have on Singaporean borrowers?

On 18 September, the U.S. Federal Reserve (Fed) reduced interest rates for the first time in four years. This was an aggressive cut of 50 basis points (bps), or 0.5%, leaving the federal funds rate at 4.75% to 5%. 

The rate cut finally took place after months of speculation by market watchers, which had pegged the reduction at 25 bps, given the Fed’s unwillingness to give up hard-fought ground in the fight against soaring inflation. It is believed that worsening labour data in August was what prompted the Fed to slash interest rates more than expected  

All well and good, but why is everyone and their grandmas reporting on this seemingly simple policy change? And how would this impact Singaporean borrowers?

Table of contents

• Inflation, interest rates and borrowing costs
  • Interest rate adjustments as an economic lever
  • A long way down before normalcy
• How will the U.S. rate cut impact borrowers in Singapore?
  • What can borrowers expect now that the U.S. Fed is cutting rates?
• SingSaver exclusive: Interest-free personal loan offers

Inflation, interest rates and borrowing costs 

Let’s recap. In the wake of the Covid-19 pandemic, the U.S. (and many other countries, including Singapore, for that matter) experienced high inflation. This was mainly due to supply chain disruptions inflicted upon the global economy because of border closures and lockdowns. 

During the pandemic, the U.S. experienced inflation levels not seen in decades, peaking at 9.1% for all goods in June 2022. This posed a serious economic danger, as the rapid increase in prices was making the cost of living unsustainable for consumers. 

In response, the Fed, which serves as the central bank for the U.S., embarked on a series of interest rate hikes to slow down the economy and bring down inflation. To understand why, we must first understand the effect of interest rate adjustments on borrowing costs. 

Interest rate adjustments as an economic lever

The interest rates maintained by central banks refer to the benchmark rate against which debt is priced. In other words, the interest rate impacts your cost of borrowing –  higher interest rates means loans, credit cards and other forms of credit become more expensive, and lower interest rates mean they become cheaper. 

Hence, you can think of interest rate adjustments as a lever used by central banks to influence economic activity. Rates are raised to cool down an overheated economy, and conversely, rates are lowered to encourage borrowing and stimulate consumer spending, stimulating economic growth. 

As an extreme example, the Bank of Japan had kept interest rates at lower than zero (yes, negative) for eight years in a bid to stimulate economic growth in the country. 

A long way down before normalcy 

Returning our discussion to the U.S., the Fed embarked on a series of rate hikes between 2022 and 2023 until the federal funds rate reached 5.25% to 5.5% – and kept it there for more than a year. 

This course of action wasn’t without controversy. Each rate hike inspired an increasingly cacophonous flurry of headlines and hot takes dooming the U.S. to recession – an event which you’ll notice hasn’t yet happened. Yes, financial news media really is the most dramatic of them all.

In any case, this brings us to now. The Fed is now working to bring interest rates back down to normal levels (which depends on how soon inflation falls back in line with the preferred rate of 2%), paving the way for lower borrowing costs. 

This means businesses and consumers are more able to access credit, leading to increased spending and driving economic growth. 

How will the U.S. rate cut impact borrowers in Singapore? 

Now, here’s the most relevant bit, and also why U.S. rate adjustments are important to Singapore. 

Unlike many countries, Singapore’s central bank, the Monetary Authority of Singapore (MAS)  does not have an interest rate policy. Instead, the Singapore Dollar is pegged to a basket of currencies of our major trade partners, weighted according to how important that economy is to our trade. 

This is due to our open economy which is heavily reliant on global trade – as such, the exchange rate between the Singapore Dollar and that of our trading partners is a greater determinant of prices, and thus has a greater impact on inflation. 

In practice, this means that interest rates in Singapore are largely determined by global rates and foreign market expectations. Broadly, our interest rate trends tend to follow those of global trends, which are led by central banks in the U.S. and other major economies. 

What can borrowers expect now that the Fed is cutting rates?

Now, it’s important to note that the U.S., being the largest and most powerful economy, inadvertently exerts economic influence over the rest of the world. Thus, it is likely that other major economies will also follow or continue the trend of bringing interest rates lower.

And since Singapore broadly goes with the flow, so to speak, it is likely that cheaper loans are on the horizon. 

Traditionally, this phenomena has been most clearly seen in home mortgages, and analysts have already noted home loans charting a similar path this cycle. 

Fixed-rate home loans have hit a low of 2.6%, compared to around 3% at the start of the year, according to Home Loan Whiz. 

Meanwhile, floating-rate home loans, which are based on three-month compounded Singapore Overnight Rate Average (Sora), have been weakening since mid-June, according to OCBC. Rates hit a low of 3.53% as at 19 September, down from 3.6% in August. 

As for personal loans and credit cards, the effect may be less pronounced. This is because factors such as market competition, consumer demand, and credit worthiness all play a part in how providers set rates for such products. 

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