Federal Reserve

Banks unlikely to follow US rate move

PUBLISHED : Monday, 07 August, 2006, 12:00am
UPDATED : Monday, 07 August, 2006, 12:00am

Low interbank charges weigh against raising borrowing costs

Hong Kong lenders say they are unlikely to raise interest rates even if the Federal Reserve takes the world's markets by surprise and nudges up United States rates by a further quarter percentage point later this week.

Raymond Or Ching-fai, vice-chairman of Hang Seng Bank, said the latest weaker than expected US economic figures made the chances of a rate rise at tomorrow's Federal Open Markets Committee meeting rather small.

Employment growth fell below market expectations and the unemployment rate rose. At Friday's close, August federal funds futures contracts in the US were pricing in only a 16 per cent chance of a 25 basis point rise in rates. That compared with 42 per cent before the jobless data was released.

'I think US interest rates may be put on hold, although it doesn't necessarily mean that rates have peaked because there's still some concern about inflation,' Mr Or said.

A decision by Hong Kong lenders on whether to follow a future US rate increase would depend on local interbank rates, which banks charge when lending to one another. 'Banks will not follow US rates higher if interbank rates stay at a low level,' he said.

Despite the link between the Hong Kong dollar and the greenback, Hong Kong lenders have increased interest rates by only 0.25 percentage point so far this year, while the US central bank has raised its key federal funds rate by one percentage point in four increments of 0.25 point.

Money continues to flow into the Hong Kong dollar, seen as a proxy for the yuan, which is under strong pressure to appreciate as a way of easing trade tensions between China and the west and cooling off the mainland's economy.

Stanley Wong Yuen-fei, general manager of ICBC (Asia), said he expected the Fed to put the rising rates cycle on pause.

'There is a risk that the US economy may be badly hit if interest rates continue to rise, given that some economic figures, such as property prices and new home sales, were weaker,' he said.

The Fed has raised rates at its last 17 consecutive meetings, lifting its principal policy rate to 5.25 per cent in June from 1 per cent.

Mr Wong, too, said Hong Kong lenders were unlikely to do anything, regardless of what the Fed decides.

'Interbank rates are still low due to ample liquidity in the market,' he said.

Local interbank rates have declined this year due to cash inflows.

One-month and three-month rates closed at 3.8 per cent and 4.255 per cent, respectively, on Friday, compared with 4.145 per cent and 4.525 per cent at the end of June.

Mr Wong said the impact on the Hong Kong stock and property markets would be positive if lenders left rates unchanged.