The Singapore Overnight Rate Average (SORA) is a key benchmark interest rate used in Singapore’s financial markets. It is the average rate at which banks lend and borrow funds overnight in the Singapore interbank market. SORA is used to price financial products such as loans, bonds, and derivatives. In this article, we will discuss everything you need to know about SORA, including what affects it and how it is calculated.
What is SORA?
SORA is the benchmark interest rate used in Singapore. It is the average rate at which banks lend and borrow funds overnight in the Singapore interbank market. SORA is published by the Monetary Authority of Singapore (MAS) and is based on actual transactions in the interbank market.
SORA is used to price financial products such as loans, bonds, and derivatives. It is also used as a reference rate for financial contracts such as interest rate swaps and floating-rate notes.
The Importance of SORA
SORA is a key benchmark interest rate in Singapore’s financial markets. It is used to price a wide range of financial products and contracts, including loans, bonds, and derivatives. As such, SORA plays a critical role in the functioning of Singapore’s financial system.
SORA is also important for the broader economy. Changes in SORA can affect borrowing costs for businesses and households, which can impact investment and consumption decisions. SORA can also affect the exchange rate and the cost of financing for the government.
What Affects SORA?
Several factors can affect SORA, including:
Monetary policy: The MAS can influence SORA through its monetary policy. If the MAS increases the supply of money in the economy, it can lower SORA. If it decreases the supply of money, it can raise SORA.
Market demand and supply: The demand and supply of funds in the interbank market can also affect SORA. If there is more demand for funds than supply, it can raise SORA. If there is more supply than demand, it can lower SORA.
Economic conditions: Economic conditions such as inflation, GDP growth, and unemployment can also affect SORA. If the economy is growing, it can lower SORA. If the economy is in a recession, it can raise SORA.
Central bank policies: The policies of other central banks, such as the US Federal Reserve or the European Central Bank, can also affect SORA. If these central banks raise their interest rates, it can raise SORA. If they lower their interest rates, it can lower SORA.
Market sentiment: Market sentiment can also affect SORA. If investors are optimistic about the economy, they may be more willing to lend funds in the interbank market, which can lower SORA. If investors are pessimistic, they may be less willing to lend funds, which can raise SORA.
How is SORA Calculated?
SORA is calculated by taking the average of the overnight borrowing and lending rates of banks in the Singapore interbank market. The rates are weighted based on the volume of transactions.
The calculation of SORA is based on actual transactions in the interbank market, which makes it a reliable and transparent benchmark rate. SORA is published daily by the MAS and is available on its website.
The calculation of SORA has changed recently, as the MAS has shifted from the use of the Singapore Interbank Offered Rate (SIBOR) to SORA. SIBOR is based on the submissions of banks, while SORA is based on actual transactions in the interbank market. The shift to SORA is part of a global trend to move away from benchmark rates that are based on bank submissions and towards benchmark rates that are based on actual transactions.
The Shift from SIBOR to SORA
The shift from SIBOR to SORA is an important development in Singapore’s financial markets. SIBOR has been the benchmark interest rate in Singapore for many years, but it is based on the submissions of banks, which can be subject to manipulation. The shift to SORA, which is based on actual transactions, makes it a more reliable and transparent benchmark rate.
The shift to SORA has been gradual. In 2019, the MAS introduced a new methodology for calculating SORA, which was based on actual transactions in the interbank market. The new methodology was designed to make SORA more robust and reliable.
In 2021, the MAS announced that it would stop publishing SIBOR after the end of 2021. This means that financial products and contracts that currently use SIBOR as a benchmark rate will need to transition to SORA or another benchmark rate.
The transition from SIBOR to SORA is expected to be completed by the end of 2021. The MAS has provided guidance and support to help market participants transition to SORA. The transition is expected to be smooth, but there may be some challenges and uncertainties along the way.
The Implications of the Shift to SORA
The shift from SIBOR to SORA has several implications for Singapore’s financial markets. One of the most significant implications is that it will make Singapore’s financial markets more robust and transparent. SORA is based on actual transactions, which makes it a more reliable benchmark rate.
The shift to SORA is also expected to increase the use of derivatives in Singapore’s financial markets. Derivatives are financial instruments that are used to manage risk. They are often priced based on benchmark rates such as SORA. The shift to SORA is expected to increase the use of derivatives, which will make Singapore’s financial markets more sophisticated and globally competitive.
The shift to SORA may also have implications for borrowers and lenders in Singapore’s financial markets. Borrowers may need to pay higher interest rates if SORA is higher than SIBOR. Lenders may also need to adjust their lending practices to reflect the shift to SORA.
Conclusion
SORA is a key benchmark interest rate in Singapore’s financial markets. It is used to price a wide range of financial products and contracts, including loans, bonds, and derivatives. SORA is affected by several factors, including monetary policy, market demand and supply, economic conditions, central bank policies, and market sentiment.
The shift from SIBOR to SORA is an important development in Singapore’s financial markets. The shift to SORA is expected to make Singapore’s financial markets more robust and transparent. The shift to SORA may also have implications for borrowers and lenders in Singapore’s financial markets. The transition from SIBOR to SORA is expected to be completed by the end of 2021.
Related topics:
What is Natural Language Inference?