Should the United States Federal Reserve raise interest rates this month the assumption in Hong Kong is that rates in the territory will follow suit. Analyst Robin Hammond says this is not justified. In fact Hong Kong banks might not decide to follow suit in prime lending rates. There is a buzz among investors surrounding the banking sector this month as anticipation of bumper interim results grow. Mr Hammond warns, the second half might not be half as good for the banking sector as the first half. Investors should not take the first half numbers as an automatic ready reckoner for profits growth in the second half. The Federal Open Markets Committee, which decides interest rate policy in the United States, is due to meet on August 20. There is a meaningful chance that a move to raise US prime rates at the meeting will not be followed in Hong Kong, Mr Hammond says. However there will be a rise in inter-bank rates and deposit rates, in line with the US rates. Hong Kong prime is at present at a 25 basis point premium to that the US. Bank rates in Hong Kong are obliged to remain near to US rates because of the pegging of the territory's currency to the US dollar. The actual level of local rates against US rates in the past has reflected prevailing macroeconomic conditions in the territory. In the mid-1980s, when there was relatively mild inflation, the Hong Kong rate was at a discount to US rates. Then, in 1988 rates were pushed down to stop pressure building up, strengthening in the currency, amid rising speculation the peg was due to be repegged. The economic trough from 1989 to 1990 meant the Hong Kong rate remained at a discount to US rates. This changes from 1990 into 1991 when the economy, inflation and property speculation picked up. Given the present mild economic slowdown, falling trade figures, modest inflation and stable property market, Mr Hammond argues a rise in Hong kong prime interest rates in the wake of a rise in the United States is unjustified. This is both good and bad news for banks in Hong Kong. Banks with a high proportion of their asset base in customer lending, and with a high proportion of loans made at prime-based rates will be adversely affected by such a turn of events. These include Bank of East Asia, International Bank of Asia and Wing Hang Bank. Bank of East Asia has 56 per cent of its asset base in customer lending with 36 per cent in short-term money. Banks with a high level of liquidity, or with a large proportion of their assets in short-rate loans or inter-bank lending, Mr Hammond says, will due well if rates in Hong Kong do not follow those of the US. Hang Seng Bank has 40 per cent of its asset base in customer lending and 51 per cent in the inter-bank market and short-term funds. Should the US prime rates rise and Hong Kong does not follow, this would be negative for the prime-based lenders, resulting in an immediate contraction in lending spreads. It would be positive for the stock market overall and in particular for property developers, Mr Hammond said.