With all the talk we are now getting about an imminent increase in US interest rates pushing Hong Kong rates even further up, it is time to point out one salient fact. Our interest rates have not been going up. In fact they have recently been going down and quite notably too. The first chart shows the picture on a comparison between Hong Kong dollar and US dollar one month interbank rates. Our interbank rates were lower than their US equivalents in May but then the first signs that US rates could be going up again sent ours shooting up much faster on the reasoning that, if they were going way up anyway (this was considered inevitable), why not take some precautions and send them up there right now. However, after peaking at about 6.4 per cent at the beginning of September, the one month interbank rate has come tumbling right back down again to only a smidgin above the US dollar level. It is not happening in the interbank market alone. The banks now formally admit that they are making mortgage loans at below their best lending rate (BLR), supposedly the absolute minimum reserved for the very best customers alone. Their figures show that 1.3 per cent of all new mortgage loans in August were made below the BLR. Given the embarrassment of having to admit that it happened in the same month as they raised the BLR, the true figure may actually be higher. Some banks are reportedly now making mortgages available at 100 basis points below the BLR. The second chart shows the trend. In March 1998, only 0.4 per cent of all mortgage loans were made at the BLR. There were none below that level. The latest figures say 82.5 per cent are now made at the BLR and remember that official 1.3 per cent below it. In March 1998, mortgage loans at more than 1 per cent of the BLR accounted for 64.4 per cent of the total. That figure is now 0.8 per cent. Yes, you may indeed wonder why the banks even bother to pretend that their announced BLR means anything. Don't bother with that pretence yourself. If you are negotiating a mortgage, push your loan officer hard and watch that rate slide smoothly under the level he calls his minimum. It is happening for a very simple reason. People are satisfied that the linkage to the US dollar will hold intact and that banks in Hong Kong are in decent financial shape. They still have lots of money and deposits are rising as they take it to the banks. But the banks are still running scared and cannot find enough borrowers to meet their tight criteria. As a result, outstanding loans continue to fall and the HK dollar loan-to-deposit ratio for licensed banks has now dropped to a record low of 87.8 per cent. When the ratio gets this skewed the laws of supply and demand take over from any pushes and pulls that US interest rates or our own monetary authorities can exert. Push your banker if you are a good risk. He'll give in. He has to. 3mon05gbz