The Hong Kong Monetary Authority yesterday announced it will remove the cap on interest rates for term deposits of less than seven days, marking a further step in the final break-up of the bank cartel. The move, which will take effect on July 3, is part of efforts by the authority to liberalise the banking sector, enhancing competition by deregulating interest rates. 'We have kept the economic and financial environment under review and have concluded that it is appropriate to proceed on schedule with the planned deregulation of interest rates,' HKMA deputy chief executive David Carse said. The authority said the economy was recovering while banks had returned to profit in the first quarter and were able to bear the change. Bad and doubtful loans had dropped to 9.28 per cent of all credits made in March from the peak of 10.33 per cent last September. Under the existing interest rate regime, banks follow the deposit interest rate set by the Hong Kong Association of Banks. The cartel arrangement for term deposits of more than seven days has been phased out progressively in the past few years, enabling banks to set their own interest rates. Deposits still governed by the cartel arrangement are term deposits under seven days, savings accounts and current accounts. The HKMA has set a two-step programme to deregulate interest rates on these accounts. The first step begins with the July 3 deregulation. Savings and current accounts will not be affected at that stage. In the second stage, scheduled to take place 12 months later, the authority will rescind interest-rate restrictions on savings and current accounts. The authority said implementation of phase two of deregulation would be subject to the prevailing economic and financial environment at the time. 'Although the first phase of deregulation is relatively modest in itself, it brings the system one step closer to the complete liberalisation of interest rates in Hong Kong,' Mr Carse said. 'The HKMA will monitor closely the impact on the banks and developments in the market ahead of the final stage of deregulation next year.' Davy Kwan Kwok-ki, senior vice-president of International Bank of Asia, expects little impact on banks from the first phase of deregulation. 'There are only a few corporate clients who would arrange one or two-day time deposits,' Mr Kwan said. He said banks would be hit in the second phase because of the huge amount of savings and current accounts they hold. Complete deregulation would lead SAR banks to follow the international practice of offering competitive packages, he said. 'This will benefit Hong Kong and help it become a leading financial centre.'