Singapore's core inflation is at a two-year high. Your mortgage may not follow.
2.2%. That's how much everyday prices rose over the past year, on Singapore's core measure of inflation. In July it was 2.0%. It's a two-year high, and it sounds like bad news for anyone with a mortgage. It may not be.
Here's why.
What the number means
Inflation is how fast prices are rising across the things we buy. Core inflation is the same measure with a few of the most jumpy items taken out, like accommodation and private transport, so it gives a steadier picture of everyday prices.
This rise came from services, retail goods and food. Airfares, taxis and ride-hailing, clothes and eating out all cost more than a year ago.
What you'd normally expect
Usually, when inflation goes up, interest rates go up with it. Lenders want to be paid more than prices are rising, or the money they get back is worth less. And in most countries, the central bank raises interest rates to cool prices down.
So it would be reasonable to expect home loan rates to rise too.
Singapore is slightly different
However, in Singapore the case is slightly different. The Monetary Authority of Singapore (MAS), our central bank, doesn't fight inflation by setting an interest rate. It manages the value of the Singapore dollar instead.
When prices rise, MAS lets the Singapore dollar get stronger. A stronger dollar makes the things we import cheaper, and Singapore imports most of what it uses. That helps bring prices down.
Why a stronger dollar can mean lower rates
There's a second effect, and it's the one that matters for your mortgage.
Banks lend Singapore dollars to each other every day. SORA, the Singapore Overnight Rate Average, is the average interest they charge for it. Many bank home loans are pegged to SORA.
Now imagine the banks expect the Singapore dollar to keep getting stronger. Just holding Singapore dollars already earns them something, because the money will be worth more later. So they're willing to lend it out for less interest. When enough of them accept less, SORA drifts down, and so do the loans pegged to it.
MAS reviews its policy four times a year, and the next review is in October. If it decides to strengthen the dollar further, floating-rate loans (the kind whose interest moves up and down with SORA) could end up slightly cheaper, not more expensive.
MAS isn't the only thing that moves SORA. Singapore rates also follow interest rates around the world, so a big move overseas can still push your rate either way.
What it means for you
This applies to bank loans pegged to SORA. If you have an HDB loan, your rate is linked to the CPF interest rate instead, so inflation news doesn't move it this way.
That's why a higher inflation number doesn't mean your home loan will follow. Don't expect a drastic increase in your mortgage rate right now. If you want to know where your instalment is heading, watch SORA, which MAS publishes on its website every working day, not the inflation headline.
Sarah Chen
