Federal Reserve

Bankers restrain forecasts for interest-rate increases

PUBLISHED : Wednesday, 20 April, 2005, 12:00am
UPDATED : Wednesday, 20 April, 2005, 12:00am

Several bankers have moderated their projections for interest-rate increases this year, on the grounds that slower growth will force the United States to raise its benchmark lending rate more slowly than expected.

Bank of East Asia chairman and chief executive David Li Kwok-po yesterday said he believed both the US federal funds rate and the local prime rate would increase by a further one percentage point this year.

By contrast, HSBC executive director and general manager Raymond Or Ching-fai last month said he expected 'at least' a one-percentage-point rise.

Several economists have forecast the prime rate would reach as high as 8 per cent - a 2.5-percentage-point increase - by the end of the year.

Since March, most banks - HSBC, Hang Seng Bank and Bank of China (HK) excepted - have raised prime rates 0.5 percentage point as three-month interbank lending rates have risen to about 2.5 per cent from 0.3 per cent at the beginning of the year.

Borrowing in cheaper Hong Kong dollars for investments in higher-yield US dollar assets has also helped push up local rates.

'Even though the minutes of the Federal Open Market Committee meeting suggested that the Federal Reserve will raise interest rates a few more times this year, it appears that they will do it slowly and cautiously,' Mr Li said. 'I doubt they will raise rates again when they meet [in May].'

Industrial and Commercial Bank of China (Asia) director and deputy general manager Stanley Wong Yuen-fai said: 'It looks like contrary to some earlier predictions, there will only be four more 25-basis-point rises by the [Fed] this year.

'And we expect Hong Kong banks to follow each one by the same magnitude.'

The divergence in prime lending rates among local banks has prompted some to suggest that a standardised benchmark should be adopted, perhaps similar to the federal funds rate in the US or based on the Hong Kong interbank offered rate (Hibor).

While accepting there should be a standard best-lending rate mortgage, Mr Li and Mr Wong dismissed the idea of using Hibor, favouring the more stable 'discount rate' - which is at 4.25 per cent now and moves in step with the federal funds rate - at which lenders obtain overnight Hong Kong dollar liquidity from the Hong Kong Monetary Authority.

'Using Hibor to set a reference rate would be difficult as it is very volatile,' Mr Li said.