CNA Explains: US Fed makes biggest rate hike since 1994 – what does it mean for you and your mortgage rate?

SINGAPORE: The United States Federal Reserve has made its biggest interest rate hike in nearly 30 years, as it steps on the pedal to combat surging inflation.

The move is set to have far-reaching implications beyond America, from choppy financial markets to slower economic recovery in other parts of the world and even higher borrowing costs for businesses and individuals. 

In Singapore, for instance, home owners may soon feel the pinch of higher mortgage rates.

With the Fed indicating the possibility of further rate hikes, we ask the experts what that means for the economy and borrowers.

Q: Why is the US Fed increasing rates and what’s next?

US officials agreed to a 0.75-percentage-point rate rise at the end of a two-day policy meeting on Wednesday (Jun 15), bringing its benchmark federal-funds rate to a range between 1.5 to 1.75 per cent.

This latest move, which came on the heels of a quarter-percentage-point increase in March and a half-percentage-point jump last month, marked the Fed’s most aggressive rate hike since November 1994. 

The US central bank is stepping up its rate-hike strategy as it races to tame inflation that has risen to a 40-year high. By sharply raising interest rates and making borrowing more costly, it hopes to cool demand in the economy by nudging consumers and businesses to curb spending.

Amid red-hot inflation, Fed officials have hinted at additional rate hikes to come.

“It is essential that we bring inflation down if we are to have a sustained period of strong labour market conditions that benefit all,” said Fed chair Jerome Powell, adding that “either a 50-basis-point or a 75-basis-point increase seems most likely” at the central bank’s next meeting.

But higher borrowing costs will also weigh on economic growth. Financial markets have been volatile in recent weeks over fears that the Fed’s rate hikes could tip the US economy into a slowdown or even a recession.

DBS chief economist Taimur Baig, who expects four more rate hikes from the Fed, said housing and investment – segments in the economy that are highly sensitive to interest rates – will weigh down on US growth through the course of next year.

“That could tip the US economy into a recession in the fourth quarter of 2023 or a tad later, which in turn could make 2024 the year of rate cuts,” he said.

Q: What does that mean for economic growth and financial markets in Asia? 

With the Fed stepping on the monetary tightening pedal, Asian central banks are likely to feel greater pressure to follow suit.

This, as a widening divergence between US and Asian interest rates will raise worries about capital outflows, said Mr Bernard Aw, economist for Asia Pacific at credit insurer Coface.

The rise in US interest rates also throws up two major headwinds for Asia’s economic recovery.

First, tighter financial conditions that would affect credit conditions and dampen investment sentiments. Second, slower growth in the US translating into lower demand for Asian exports, Mr Aw said.

With that, Asian economies that have yet to recover fully from the economic hit of the COVID-19 pandemic, such as Thailand, Malaysia and the Philippines, may feel a larger impact, said Mr Aw.

Industries that are more rate-sensitive, like construction and energy, will also be more vulnerable to rising interest rates, he added.

Turning to financial markets, volatility is likely to persist.

Asian markets had initially cheered the widely expected rate hike on Thursday morning until brewing unease over the course of the trading day ate away at gains.

Apart from concerns about surging inflation and the risk of a US recession, worries are also brewing over the health of China’s economy following strict COVID-19 lockdowns.

Meanwhile, food and fuel price pressures remain, implying further upside inflation risks for ASEAN economies and in turn, further pressure for Asian central banks to tighten monetary policy, said Ms Selena Ling, chief economist and head of treasury research and strategy at OCBC Bank.

“Central bank tightening to fight inflation will also hurt growth so net-net, third quarter is going to remain fairly choppy,” she told CNA.

“Tightening financial conditions will continue to play a big role in the second half of this year and I think that will weigh on any upside that people may be hoping for Asian markets.”

Q: What does it mean for you?

Back home, analysts such as Mr Aw expect the Monetary Authority of Singapore (MAS) to “be patient” with its next tightening move, most likely during its next scheduled policy meeting in October.

The Singapore central bank has thus far tightened its exchange rate-based monetary policy three times since last October, including an off-cycle surprise in January.

This means a firmer Singapore dollar is here to stay, which will help to make imports cheaper and defend the purchasing power of Singapore consumers and businesses.

But rate hikes by the Fed will also translate into upward pressure on interest rates here, given how Singapore is an “interest-rate taker”, experts have told CNA. This is set to raise the costs of all types of borrowing, from mortgages to credit cards and car loans.

Already, the Singapore Overnight Rate Average (SORA) – one of the benchmark rates used by banks here to determine rates for their floating-rate home loans – has increased by more than 100 per cent since early this year, said SingCapital’s chief executive Alfred Chia.

“This has certainly increased the mortgage rate for home owners using loan packages pegged to SORA rates,” he added.

Meanwhile, fixed-rate packages have also seen higher rates, with some banks having revised their rates by “more than three times” this year, said Mr Chia.

“With (the) Fed determined to tame inflation, the interest rate is expected to increase further. This will have an impact (on) our mortgage packages - both SORA-pegged and fixed rates,” he told CNA.

Mr Steven Tan, chief executive officer of OrangeTee & Tie, reckons that floating-rate home loans “could rise from around 1.5 per cent to above 2 per cent by the end of the year”. 

“The fixed-rate now is about 2.5 per cent but some banks may stop offering fixed rates until the situation is stabilised,” he added.

With that, Mr Chia advises home owners to review their mortgages and go for repricing or refinancing to better manage their home loans.