The hikes will have a ripple effect on the global economy, including Singapore. Here's how they could affect you.

In March 2022, the United States Federal Reserve (US Fed) approved its first interest rate hike since 2018, with six more rate increases planned for the year.

Generally speaking, policymakers adjust interest rates upwards as a response to rising inflation. The latest move aims to combat the 40-year high inflation rate in the US. It comes after near-zero interest rates in the last two years due to COVID-19, when the US Fed sought to encourage spending to help the economy.

Though unsurprising, the expected magnitude of the interest rate hike is the largest in 22 years and, naturally, has grabbed the world’s attention. Its effects are set to ripple through the global economy.

But how exactly will this affect us? We take a closer look at three areas of concern:

1. Home loan pain

Higher interest rates mean a higher cost of taking up a loan. Banks and lenders in the US have begun raising their mortgage rates in the wake of the hike. Singapore banks are likely to follow suit.

Households will then need to set aside more money for repaying home loans. Readjustment of expenditure may be necessary to plan for and respond to this hike.

Businesses and those with car loans will also have to deal with higher interest rates.

It is a timely reminder to exercise caution - buyers should be sure of their ability to service their loans in a high interest rate environment before making long-term financial commitments.


2. More uncertainty with investments

The US stock market fell early this year in anticipation of the US Fed’s impending interest hike. With the hike came a sell-off frenzy as investors scrambled for a safer holding place. It is not surprising as the policy recalibration process will usually lead to increased market volatility, especially in the initial stages.

However, what surprised investors this year was the war in Ukraine as well as the stringent COVID-19 lockdowns in China. It added to the inflation risks and consequently monetary policy uncertainties.

While it is always difficult to time the market, it is prudent to position the portfolio for an economic slowdown given the many uncertainties. Mr Eddy Loh, Chief Investment Officer of Maybank Group Wealth Management, remarked, “In this volatile environment, it is not the time to take aggressive bets but to build portfolio resilience amid rising risks. Investors should stay engaged but diversify across assets to reduce concentration risk, and improve portfolio quality by focusing on investments that are better positioned to navigate any potential downturns. Last but not least, investors may manage downside risks with cash buffer and hedges as well as reduce portfolio leverage if necessary.”


3. Is recession on the way?

Higher interest rates could dent global economic growth and recovery as countries follow suit in their interest rate policies.

Usually, savings interest rates will track short term interest rates and bond yields but with a lag. With higher savings rates, consumers will be incentivised to save rather than spend, resulting in a slower rate of economic growth. The higher inflation could also curb spending power.

Coupled with geopolitical tensions lingering over the war in Ukraine as well as the risks of new COVID-19 variants, there could be more downside risks to economic growth.

Notably, Singapore Prime Minister Lee Hsien Loong has warned of high inflation in this year’s May Day Rally. He said, “Global growth will be weaker, and there may be a recession within the next two years.”

Ready your umbrella

The skies ahead seem dark and gloomy, but with some preparation any investor should be able to weather the worst of any crisis. More importantly, it would be prudent for us to begin preparing now before an economic storm breaks.

It may be time to review your spending, look at how to reduce interest rate payments while also diversifying your portfolio to prepare for the volatility ahead.

Get in touch with Maybank’s friendly staff if you need personalised financial advice.

the bottom line:

Getting through the rate hikes in the US will be an uphill task, so start preparing early.

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