[SINGAPORE] Analysts expect there is a limit to the decline in Singapore’s benchmark interest rates ahead, especially as Sing dollar rates are currently already at a historically wide discount from US dollar rates.
The impact of impending US rate cuts are also unclear, given that Sing dollar rates seem to have decoupled from US dollar rates for a large part of this year, said Eugene Leow, senior rates strategist at DBS.
The Singapore Overnight Rate Average (Sora) fell sharply in 2025, driven by flushed domestic liquidity and safe-haven inflows.
As at Aug 22, the three-month compounded Sora stood at 1.65 per cent, down 137 basis points year to date.
Leow noted that investors were losing confidence in US dollar assets after US President Donald Trump’s Liberation Day, and were diversifying their holdings.
“If investors seek safety amid the rebalancing, there are very few alternatives to the US dollar. Moreover, the size of Sing dollar assets available to investors is very small,” he said.
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This drove longer-term rates in Singapore, Hong Kong and Switzerland lower, decoupling from their developed market counterparts, such as in the US, UK, Europe and Japan, where fiscal worries are dominant, he said.
Prevailing liquidity – which can change “swiftly” – has also kept short-end interest rates volatile, said Frances Cheung, head of foreign exchange and rates strategy at OCBC.
For example, the Sora was last at 1.7 per cent, after falling below 1.2 per cent in mid-August, she noted.
Cheung expects that Sing dollar rates will stay anchored in the near-term, as the existing liquidity will likely stay in the system before additional bill issuances mop them up, or before a stronger improvement in loan demand.
But DBS’ Leow said the rate discount would likely reach a point where it would be “too wide” – rates in Hong Kong and Switzerland have already started to drift higher recently.
He said: “While there are good reasons why Sing dollar rates are so low, we think that it would be difficult for Sing dollar rates to go lower if the rest of the world are seeing higher rates.”
UOB’s global economics and markets research team also said there is a limit as to how much lower the Sora could drop further, although it expects the benchmark rate will need more time to find a “firmer footing”.
US Fed cuts “will no doubt keep Sora depressed” alongside US benchmark rates, while further easing of Singapore’s monetary policy will also have an impact, it said in an Aug 4 report.
UOB is forecasting the three-month compounded Sora will reach 1.74 per cent in Q4 2025 and 1.63 per cent for Q2 2026.
Meanwhile, Maybank regional co-head of macro research Chua Hak Bin said Sora will likely continue sliding for the rest of the year, driven by safe haven flows and Fed rate cuts.
He expects rates will fall to about 1.5 per cent by end-2025 and 1.2 per cent by end-2026.
“Singapore’s strong fiscal standing, stable government and appreciating currency bias is attracting safe haven capital flows, despite the widening gap between Singapore and US interest rates,” he said.
