This week, the average overnight interest rate (SORA) in Singapore fell to 2.08%, the lowest level since 2022, indicating loose market liquidity, mainly due to:

Slowing credit demand: Singapore's economic growth is facing challenges, with reduced borrowing demand from businesses and individuals, leading to ample funds in the banking system.

Foreign capital inflows into fixed deposits: International capital flows into Singapore's banking system, increasing deposit size and maintaining a low interest rate environment.

Strong performance of the Singapore dollar: The Singapore dollar has shown outstanding performance among Asian currencies, supported by the stability of the Chinese yuan, and the market has strong confidence in it, reducing market expectations for high interest rates.

Singapore's liquidity remains loose, and investors still expect the Singapore dollar to remain strong, despite MAS slowing down its appreciation pace in January. "- Frances Cheung, Head of Foreign Exchange and Interest Rate Strategy at OCBC

MAS adjusted its monetary policy in January to slow down the pace of appreciation of the Singapore dollar, which was originally expected to lead to a weakening of the Singapore dollar and push up market interest rates. However, investors have not responded to expectations of a depreciation of the Singapore dollar, for reasons including:

The Singapore dollar still maintains an advantage over Asian currencies, especially as the stability of the Chinese yuan enhances market confidence in the Singapore dollar;

The banking system has sufficient liquidity, the demand for loans has decreased, and the market does not need to significantly raise interest rates to attract funds;

Strong demand in the bond market and strong auction performance of treasury bond further depressed market interest rates.

The loan to deposit ratio of Singapore's banking system decreased from 70.5% at the end of 2023 to 68.2% in January, reflecting weak loan demand. MAS had previously warned of downside risks to economic growth, and a decrease in loans could be a signal of declining business confidence.

The low interest rate environment in the Singapore market has had a chain reaction on the Asian foreign exchange market, with the exchange rate of the New Zealand dollar against the Singapore dollar continuing to decline recently, mainly due to:

The New Zealand dollar remains strong: Singapore's monetary policy adjustment has not led to a significant depreciation, on the contrary, its strong performance in the Asian market has made the New Zealand dollar relatively weak.

Weak commodity prices: The New Zealand dollar is usually related to the trend of commodities, and the recent slowdown in global economic growth has led to a decrease in demand for commodities, affecting the trend of the New Zealand dollar.

Changes in capital flows between Singapore and Asian markets: The Singapore dollar is relatively stable, while the New Zealand dollar is more affected by external market fluctuations, leading to a greater tendency for funds to flow into the Singapore market rather than New Zealand.

The downward pressure on the New Zealand dollar mainly comes from the stability of the Singapore dollar and the uncertainty of the global market. Investors may continue to seek more stable currencies such as the Singapore dollar. "- HSBC foreign exchange strategist

Although the decrease in interest rates provides some support for economic growth, analysts believe that Singapore authorities will not want interest rates to remain low for a long time, especially as the real estate market still faces the risk of overheating.

If interest rates remain too low for a long time, it may affect the government's goal of regulating the real estate market. "- Audrey Ong, strategist at Barclays

If low interest rates lead to a rapid increase in housing prices, MAS may take additional measures to curb the rise, such as adjusting loan restrictions or further adjusting exchange rate policies.

The inflow of funds not only drives the growth of bank deposits, but also reflects in the bond market. The bid coverage rate of Singapore government bonds issued on February 26 in 2035 reached 2.03 times, the highest level of 10-year treasury bond since July 2022.

This indicates strong demand for Singaporean assets in the market, which also supports the Singapore dollar and exacerbates the depreciation pressure on it.

Future prospects:

Singapore's liquidity remains loose in the short term, market interest rates may remain low, and corporate loan costs may decrease;

MAS may evaluate the effectiveness of policies in the coming months and adjust policies if low interest rates affect the real estate market;

The New Zealand dollar may continue to be under pressure due to the relative strength of the Singapore dollar and the weakness of the commodity market, resulting in a weak trend against the Singapore dollar in the short term.

Overall, the loose environment in the Singapore currency market poses certain pressure on the New Zealand dollar. If global market volatility intensifies, funds may continue to flow to more stable markets such as Singapore rather than New Zealand, which could exacerbate the downward trend of the New Zealand dollar.