Secondly, the “pass-through” rate, which is the correlation between FFR and local borrowing rates such as Sora, is beginning to diverge. For much of last year, the pass-through to local rates was almost 100% until around 4Q2022. As an example, the risk-free rates of US treasuries and Singapore Government Securities had a strong correlation until around September 2022 after which they diverged in absolute values. Their trends, however, remain well correlated (see Chart 1).
The main message from the management of the three local banks for the results season for FY2022 ended December 2022 is that the biggest increase in net interest margins (NIM) may be behind us.
This is due to two reasons. First off, the Federal Reserve’s main interest rate hikes are over. Economists are expecting two more hikes, which could take the Fed Funds Rate (FFR) to as high as 5.5%. As at Feb 27, the FFR is at 4.5%–4.75%. But the increase from 25 basis points (bps) to 4.75% is unlikely to be repeated. Meanwhile, banks are paying more for fixed deposits as customers move monies from low-cost Casa (current account savings account) to costlier fixed deposits.
