Cuts in interest rates will be insufficient on their own to kick-start Hong Kong's recovery, according to Hongkong Bank. It considered external factors more important to the recovery process. In the past two months, SAR banks have cut interest rates by 50 basis points in two separate moves following three cuts in the US Federal funds rate totalling 75 basis points. Hongkong Bank said that, since the SAR's inflation rate was declining, real interest rates - nominal interest rates minus inflation - would increase significantly, wiping out the positive effect on the economy of reductions in nominal interest rates. The bank, in the latest issue of its monthly economic newsletter, said it believed Hong Kong's economic recovery would hinge more on its external sector. 'Monetary easing in the US and other major economies resulting from easing interest rates should help sustain demand for exports and re-exports,' it said. Since August, Hong Kong banks have endured five consecutive weeks of negative, and three weeks of below-average interest rate spreads, as measured by the gap between the prime rate and interbank rates. Spreads had widened again following implementation of the Hong Kong Monetary Authority's seven technical measures to strengthen the currency-board system. As a result, banks - particularly smaller ones with fewer fee-income sources - might try to take advantage of the wider spreads for a longer period to recoup earlier losses. This explained why Hong Kong had not cut rates as aggressively as the US recently. 'This suggests that the synchronisation of Hong Kong and US interest rates will take place only when banks have the opportunity to re-price their time deposits at the prevailing lower rates,' the bank said. Hong Kong's interbank rates had been raised to very high levels on mounting speculative pressure on the currency, stock and futures markets, prompting the authority to intervene in the markets. The bank estimated that real interest rates could rise to 6 to 7 per cent early next year, when inflation is expected to fall into negative territory. High real interest rates will constrain lending activities and consumption. 'The reduction in [nominal] interest rates may ease the pain but not alter the path of adjustment,' the bank said.