Singapore’s recent decision to tighten its monetary policy for the first time since 2022 is expected to exert pressure on the Singapore Overnight Rate Average (SORA) and banks’ net interest margins (NIMs), according to a CreditSights report. The Monetary Authority of Singapore (MAS) allowed a stronger Singapore Dollar (SGD) in response to inflation risks heightened by tensions in the Middle East.
The stronger SGD, coupled with lower US policy rates, is anticipated to attract capital inflows into SGD assets. These inflows could be further bolstered by safe-haven investments due to the Middle East conflict, leading to increased banking system liquidity and potentially lower SORA. However, with global rate directions likely to trend upwards, a pause in the downward movement of SORA may occur in the near term.
Despite the pressure on NIMs, banks are expected to continue deploying excess funding into High-Quality Liquid Assets (HQLA) to support net interest income. Additionally, capital inflows are projected to bolster wealth-related income, whilst lower rates should help mitigate credit risks.
The report highlights that whilst the immediate effects of the policy shift may challenge banks, the strategic deployment of resources and capital inflows could provide some relief. As the situation evolves, banks will need to navigate these changes carefully to maintain financial stability.
