Understanding SORA Outlook and Hedging Strategies: A Forecast for Singapore’s Interest Rate
Published on: 28th February 2023
The Singapore Overnight Rate Average(SORA) is an interest rate benchmark that reflects the average rate at which banks in Singapore borrow funds overnight from one another. It is replacing SOR (Singapore Dollar Swap Offer Rate) and SIBOR (Singapore Interbank Offered Rate) for use in Singapore dollar interest rate products such as loans.
SORA Interest Rate and Inflation Trends
The inflation in Singapore peaked at 7.5% in August and September 2022 and has since come down to 6.6%. In January 2023, it ticked higher to 6.6% from 6.5%. The Monetary Authority of Singapore (MAS) tightened the monetary policy in its October meeting to protect high import costs. The MAS controls monetary policy through exchange rates rather than interest rates, which are more impacted by the Federal Reserve (FED) rate decisions and demand-supply movements.
SORA Forecast Based on FED Dot Plot and FRA Curve Movement
According to FED Dot Plot, the rates will rise and peak out in 2023 and then gradually come down as there will be rate cuts to boost the economy post-recession gradually. The FRA curve movement also indicates the same for SORA. The base view of rates rising in the short term but falling back in the long term suggests that no hedge should lock long-term rates.
SORA Hedge Strategy and Rate Structures
A Cap floor or a cap structure seems appropriate, which allows companies to benefit when rates come down. Companies may avoid locking in long-term rates and instead use a hedging strategy that benefits from falling rates. Using a cap structure is a better hedge strategy for the long-term, while a Cap floor can be used for the short-term.
SORA 1-Month and 3-Month Rate Chart and SORA Rate Curve
It’s essential to keep an eye on the SORA rate chart and the SORA rate curve to track any changes in interest rates. The SORA 3-month rate and the SORA 1-month rate have both increased since the peak in August and September 2022 but have since moderated to 6.6%. Monitoring these trends can help in devising effective hedging strategies.