The Hong Kong Association of Banks expects interest rates to rise in the second-half and the mortgage price war to continue. Speaking after the association's weekly interest rate meeting yesterday, at which the savings account interest rate was left at 4.75 per cent, chairman Raymond Or Ching-fai forecast a possible 25 basis-point interest rate rise in August. However, Mr Or does not expect rates to go any higher given recent figures which suggest an economic slowdown later in the year. 'We need to watch the situation further. Recently released figures [in the United States] indicated a strong but slower economy,' he said, adding that interest rates will peak by the end of the year. Mr Or said the mortgage market would remain competitive in the second half, describing it as an 'unforgiving battlefield', but he saw limited room for further mortgage rate declines. 'The economy is still in the process of recovering, loan demand is still quite slow, but there is ample bank liquidity. So banks will not let go of any opportunity to do business that has relatively good profit margins.' Although banks are facing smaller interest margins amid the mortgage price war, Mr Or said the Government's move to cut back on planned supply of public housing units has had a positive impact on the housing and mortgage market. 'Whether prices have risen is one thing, [however] the number of transactions have gone up, which is an encouraging sign,' he said. Mr Or also said he was not too concerned about banks' profitability in an increasingly competitive operating environment. 'Many banks are making forays into Internet banking, unit-trust sales and the insurance business. These can reduce banks' reliance on pure interest-based income.' Meanwhile, Mr Or said the scrapping of the interest-rate ceiling on short-term time deposits which takes effect on Monday would have limited impact on operations at most banks. 'This phase of deregulation will only apply to deposits of six days or less, and of HK$500,000 or lower. These deposits account for less than 1 per cent of total bank deposits,' he said. 'But, of course, banks have to prepare for the second phase of deregulation, which will affect their operations in a much more widespread manner.' Banks are widely expected to introduce service charges when final liberalisation of current and savings accounts takes place in July next year, to compensate for increased interest expenses when they are free to offer higher deposit rates than their competitors.