Recently, the US central bank, also known as the Federal Reserve, made the widely expected move to raise interest rates by 25 basis points. The Fed’s recent interest rate hike was the third in 2017. The interest rates range is now at 1.25-1.50%. For months, the Fed has been giving clear signals to the market that it will be raising interest rates as the US economy recovers.
At the same time, China’s central bank has also made a similar move to raise interest rates. To the surprise of some economists, the People’s Bank of China raised its one-year medium-term lending facility by 5 basis points.
With the two largest economies in the world on a rate hike, what should your immediate concern be? There are five groups of people who should be concerned by the latest interest rate hike.
As homeowners, you would have undertaken a home loan to finance your home purchase. As a customer with a loan from the bank, you are the primary group of people to be affected by the interest rate hike. This is because of the banks’ interest rate charges on your home loan.
Every home loan has an interest rate element. This interest rate element can either be fixed (usually in the first few years of the loan) or floating. For floating interest rates, banks usually adopt a standard interest rate benchmark like SIBOR, SOR or DBS’ FHR and OCBC’s FDMR. As the name suggests, floating interest rates fluctuate on a daily basis. These benchmark interest rates have a strong correlation to the Fed’s interest rate.
In other words, with Fed having just raised its interest rate, the rate on most home loans would trend upwards as well. This would essentially translate to higher interest payments for you as a borrower.
2. Uncleared credit card debts
Aside from the homeowners, another group of people that should be concerned is those who have uncleared credit card debts. Credit card debts are a form of unsecured loans from the bank to you. Like all forms of debts, it comes with an interest rate element. Unsecured loans have the most expensive interest rates among all the loans that banks offer.
In general, credit card interest rates are set at a premium to a bank’s prime rate. When the Fed announced that it has raised interest rates a few weeks ago, banks’ prime rate would have increased instantaneously. As a result, your uncleared credit card debts would become more expensive to clear as the new interest rate charges kick in.
3. Those vested in the stock market
The Fed’s interest rate decisions do not directly impact the stock market. However, it does impact businesses in terms of cost of borrowing. Businesses will find it more difficult to borrow money from banks or have to borrow at a higher interest rate. This makes it more difficult for businesses to pursue business opportunities at a cost-effective interest rate.
Moreover, when interest rates are raised, consumers like yourself have more incentive to save. This will lead to less spending, which will affect businesses revenue and profit. Eventually, this will impact the stock market, which is underpinned by the revenue and profits of businesses.
If you are holding on to any Singapore Savings Bonds (SSBs), you will fall into this category.
When the Fed raised its interest rates, the price of bonds (including SSBs) would fall. This is to reflect the change in interest rates so that new bond investors receive their appropriate payout. If the price of bonds does not change, new investors wouldn’t be interested in bonds with low interest rates. They would rather invest their money in bonds with the appropriate interest rates.
But if you are holding on to SSBs, don’t panic. You would still be receiving the same rate of return as per the point of your investment. That is one beauty of investing in bonds.
If you do not fall into any of the groups mentioned above, then you would fall into this group. Anyone who has a saving account would be affected by the rising interest rates. Now, before you start panicking, be reassured that rising interest rate is a good thing for you if you are a saver.
When interest rates are raised, financial institutions will offer you a higher savings interest on your deposits. This is because banks need to offer you greater incentives for you to place your deposits with them than to invest in bonds.
Related: 52 Ways to Save Money in Singapore