Hong Kong's economic future remains bleak, with property prices likely to fall another 25 per cent and interest rates to remain high, according to Nomura International. Hong Kong head of research Mark Simpson said yesterday that the domestic economy could contract a further 3 per cent this year. It was at the mercy of interest-rate movements in the United States, as well as the flagging economic fortunes of the mainland, he said. With expectations that the US Federal Reserve's next move will be to raise rates to rein in the strong US economy, Hong Kong could suffer further economic hardship. This would put paid to a recovery led by an interest-rate cut which was predicted by some analysts, he said. With the prime rate falling at best to 8.5 per cent, real interest rates were likely to stay around 12 per cent because of deflation. High interest rates would also keep a lid on any rebound in the property market, said Nomura property analyst Tony Darwell, who predicted a further 25 per cent drop in prices this year, on top of a 40 per cent fall from their peak in 1997. Mr Darwell said that, contrary to market suggestions, there was no undersupply of property to prop up prices. Mr Simpson said an expected mainalnd slowdown would also hurt Hong Kong. 'China's structural reforms are positive in the long term, but in the short term will weigh on growth rates,' said Mr Simpson. Already SAR's trade was suffering because less mainland cargo was coming through Hong Kong's port. In turn the mainland's deteriorating trade position could put pressure on the yuan, causing Beijing to consider devaluing it. Mr Simpson proposed the introduction of a progressive income tax in Hong Kong as a way of lifting the dwindling government revenue base.