Bankers step up calls for rate rise
Bankers are calling for prime lending rates to be increased this week in reaction to continued high interbank rates which have eroded their profitability.
On October 23, banks increased the prime rate from 8.75 per cent to 9.5 per cent when overnight interbank rates rose to 300 per cent.
Interbank rates have remained high ever since and were further increased on Monday following the run on the International Bank of Asia and financial turmoil in Korea.
The one-month Hong Kong interbank rate yesterday stood at 14.5 to 15 per cent, compared with 9 per cent on Monday.
Increases in interbank rates significantly increase banks' cost of funding if lending rates fail to match the rises, eroding profitability, bankers said.
Chief Executive Tung Chee-hwa and the SAR's three note issuing banks on Monday said interbank rates may increase further in the near future as the defence of the peg continues, increasing calls for lending rates to be raised.
Some market practitioners hinted the Government had actively discouraged banks from raising their lending rates this week given current market sentiment.
Hong Kong Monetary Authority deputy chief executive David Carse denied these rumours, saying prime rates were decided by individual banks and that it was a commercial decision.
'I believe banks will consider the current market environment when they decide whether to increase the prime rate,' he said.
Standard Chartered Bank regional treasurer Stanley Wong Yung-fai said there was increasing pressure for banks to further increase the prime lending rate.
'It is difficult for a bank when the interbank rate is 5 per cent more than the 9.5 per cent prime lending rate. It means profit is being eroded,' Mr Wong said.
He said if interbank rates were maintained at 15 per cent in the next two days it was likely banks would raise the prime lending rate by one per cent to 10.5 per cent.
He agreed most banks also would pay special attention to the public's reaction and the effect on the economy before making any decision.
Wing Hang Bank chairman and chief executive Patrick Fung Yuk-bun said: 'It is very difficult for banks to operate in a long-term situation when interbank rates are higher than the prime lending rate.' Market sources said one reason interbank rates had remained high was that banks were trying to avoid borrowing from the HKMA's Liquidity Adjustment Facility (LAF), the discount window of the SAR which provides last-resort funding for banks on a daily basis.
They have been avoiding the LAF since October 23 after the HKMA said it would penalise banks which repeatedly use the LAF to provide funds to speculators on the Hong Kong dollar.
Last Friday, the HKMA sent a letter to all banks stating the authority would not penalise banks using the LAF for day-to-day operations.
Market sources said the letter was aimed at easing pressure on the interbank market by encouraging banks to use the LAF again.
