Hong Kong banks followed the US Federal Reserve and announced a 50 basis point increase in key interest rates - amid warnings of more to come. The move yesterday was triggered by the Fed's decision on Tuesday to lift its overnight lending rate to banks by 50 basis points to 6.5 per cent, and the need to defend Hong Kong's fixed exchange rate against capital flight into higher interest-bearing US dollars. Hong Kong Association of Banks chairman Raymond Or Ching-fai said after the association's meeting yesterday that regulated short-term deposit rates would be increased from 4.25 per cent to 4.75 per cent. In simultaneous statements, the SAR's largest bank, HSBC, as well as Standard Chartered Bank and the Bank of China's Hong Kong branch, announced they would increase their prime lending rates by the same margin to 9.5 per cent. Other banks are expected to follow suit. The higher prime lending rates will have an immediate impact on the repayment of floating-rate mortgage loans, while higher borrowing costs and the outlook of more rate rises to come will also apply the brakes to economic growth at home and through the region. However, analysts were last night divided on the severity of the possible economic impact of the move. As a result of yesterday's rate increase, the repayment on a typical home mortgage of HK$1 million, repayable over 25 years and pegged to the previous prime lending rate of 9 per cent, will now increase by HK$345 a month from HK$8,392, to HK$8,737. Monthly repayments on a HK$2 million mortgage will rise by HK$690 from HK$16,784, to HK$17,474; while a HK$3 million mortgage will cost an extra HK$1,035 a month - up from HK$25,176 to HK$26,211. Since Hong Kong's consumers count property as their biggest asset, and the rate increases are likely to aggravate an already weak property market, the latest developments will depress consumer sentiment, warned Standard Chartered chief economist for the region, Kwok Kwok-chuen. 'Now the real issue is what will happen in the coming months - and I believe we will see a further 75 basis points added to rates before the end of the year,' he said. However, Mr Kwok said that while he was likely to revise growth forecasts downwards he had not yet amended his forecast made in March of 8 per cent growth in Hong Kong's gross domestic product this year. 'At the time we made the forecast, the final quarter data for 1999 was strong, and we expected first quarter growth of 12 per cent,' he said. The government will release the official estimate of first quarter GDP growth next Friday. Morgan Stanley Dean Witter economist Andy Xie had forecast 5.7 per cent GDP growth for Hong Kong this year followed by 4 per cent next year and last night was also sticking with this view. 'China trade, not property, is driving the Hong Kong economy and so the rate increases, per se, may not have such a big effect,' said Mr Xie. However, he cautioned that since 40 per cent of the mainland's exports went to the US any further rate increases and a sharp fall in US consumer demand would feed into slower economic growth on the mainland, and in Hong Kong. For the moment, he remained fairly optimistic about US economic growth, which he forecast at 3.7 per cent for this year. 'But this will hinge on inflation remaining benign, and for the moment we see just one more 50 basis point rise in rates by the Fed in August,' he said. Merrill Lynch senior economist Guonan Ma said the house view was for one further 25 basis point increase in US rates. 'But personally I believe we could see another 50-to-75 basis points and a more pronounced slowdown in US economic growth, which would not be good news for Hong Kong or the region,' said Mr Ma. Dong Tao, senior regional economist for CS First Boston, warned that the real concern was not this week's rate rise, nor the prospect of another 50 or 75 basis points added to rates in coming months. He said: 'The worrying issue is what happens further out, and we are now in unchartered territory.'