Bankers expect Fed to raise rates - and they will follow
Observers say 0.25 percentage point rise likely despite the impact of hurricane
Hong Kong banks are likely to match an expected move by the United States Federal Reserve to raise its Fed funds rate by another 0.25 percentage point tomorrow, raising their prime lending rates and saving deposit rates by the same margin, according to bankers.
The prime rate, used by local lenders as a benchmark for pricing mortgage lending, may increase to 7 per cent from 6.75 per cent, putting more pressure on homebuyers' borrowing costs.
'An interest rate rise inevitably will cause some impact [to the property market] but it won't be great as the effective mortgage rate is still relatively low compared with a few years ago,' said Raymond Or Ching-fai, vice-chairman and chief executive of Hang Seng Bank.
Brian Cheung Nam-chong, a senior manager at Liu Chong Hing Bank, said mortgage borrowers were already paying $1,000 more a month for every million dollars of borrowing following a series of interest rate rises.
The prime rate has increased by 1.75 per cent to 6.75 per cent this year.
However, Mr Cheung expected property developers to cut home prices indirectly by providing more subsidies to lure homebuyers in the hope the US interest rate rise cycle would come to an end next year and reduce the impact on borrowers.
There are still mixed views on whether the Fed funds rate will be raised at all this week, after Hurricane Katrina devastated parts of the US Gulf states.
Mr Or believed there was a high probability that the Fed would raise interest rates by another 0.25 percentage point tomorrow, bringing the Fed funds rate to 3.75 per cent and that Hong Kong lenders were likely to lift their prime lending and saving deposit rates in tandem.
Most savings deposit rates now stand at 1.5 per cent.
He said the pace of US interest rate rises might be slowed by the hurricane damage, but he believed the interest rate cycle had not yet peaked as there were still some signs of inflation.
'To what extent the US interest rates peak depends on further economic figures,' he said.
Mr Or said he expected the Fed funds rate to increase a further 0.25 to 0.5 percentage point [including tomorrow's expected adjustment] by the end of this year instead of the 0.5 to 0.75 percentage point rise forecast earlier.
Stanley Wong Yuen-fei, a director and deputy general manager at ICBC (Asia) also expected an increase in US rates tomorrow and said he did not believe the Fed would change its interest-rate policy due to a one-off event such as Katrina.
'The interest rate rise cycle may be completed earlier [and] the statement after the Federal Open Market Committee meeting may give some indication,' he said.