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Kelvin Chan

But a small rise in the US will have little flow-on effect for HK homeowners

Today could mark the beginning of a new cycle for interest rates and the end of  cheap money in the United States and Hong Kong, according to market watchers.

The United States central bank, the Federal Reserve, meets in Washington  amid high expectations it will put rates up - and continue the trend into the rest of the year.

With the Hong Kong dollar pegged to the greenback, Hong Kong followed suit the last time the  Fed raised its benchmark rate, to 1.25 per cent on June 30, after more than a year at a record low of 1 per cent.

The Hong Kong Monetary Authority increased the benchmark to 2.75 per cent, from 2.5 per cent.

If rates go up today by another 25 basis points, exporters should not be worried,  said Cliff Sun Kai-lit,  chairman of the Hong Kong Exporters' Association.

'I doubt very much if an increment in the interest rate would have a very drastic impact on Hong Kong exports.'

Higher rates could mean a stronger US dollar,  and while that would mean little for US companies buying from Hong Kong,  it would erode buying power for customers in Europe and Australia, he said.

Mr Sun  said higher rates  would not push Americans to save more and spend less.

'What will stop Americans' buying habits and spending habits is something as drastic as 9/11, not a 1 per cent increase in interest rates,' he said.

Higher rates will also affect mortgages. Hong Kong banks  absorbed the June 30 rise,  as they had  ignored earlier rate cuts. But HSBC executives suggest banks will have to  pass on at least some of the rise to customers.

HSBC general manager Raymond Or  said  the bank may raise rates but not by the same amount the US does.

That could translate to a disadvantage for local homebuyers, but not right away.

At Dah Sing Bank, the mortgage rate being offered is prime minus 2.75 per cent for a minimum $3 million. With the prime rate at 5 per cent, that means an absolute rate of 2.25 per cent. It has been at the same level for about half a year.

Spokeswoman Veronica Lam  said although interest rates in the US had been going up, it  was uncertain  if Dah Sing  would follow.

'It's hard to predict because all our competitors are offering similar rates,' Ms Lam said. 'I doubt whether someone would start raising rates, because the market is intense right now.'

Dennis Tang Kwok-leung,  senior manager and head of secured loans at Hang Seng Bank, said mortgage rates  were at a historical low so  a rates rise would have  little effect  in the near-term.

'That's why I think the current trend of mortgage rate increases will not really hit our customers for at least one or two years,' Mr Tang said. 'Of course it depends on how quickly US rates increase. Most people will not expect that US rates will increase too quickly.'

Hang Seng also offers a mortgage rate of about prime minus 2.75 per cent. At the current effective rate of 2.25 per cent, a 20-year mortgage worth $100,000 would require monthly payments of $517.80. If the rate went up by 2 percentage points, monthly payments would have to rise to $619.20, Mr Tang said.



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Rates move spells the end of an era of cheap money