The stock market saw its sharpest one-day fall in two months yesterday as investors fretted over the potential fallout of rising short-term interest rates. A post-results sell-off of HSBC Holdings and a huge share placement in China Petroleum & Chemical Corp also dampened sentiment, according to brokers, as the Hang Seng Index slid 210.37 points, or 1.5 per cent, to close at 13,850.78. Most traders and analysts discounted the impact of the reported resignation of Chief Executive Tung Chee-hwa, saying that while the news might have injected a measure of political uncertainty, the poor market sentiment was rooted in corporate and economic factors. A key worry is that more expensive money in the interbank market will soon force banks to raise core lending rates. Demand for US dollars continues to outweigh that for the local currency, forcing the Hong Kong Monetary Authority to buy Hong Kong dollars to defend the peg. Short-term interest rates rose sharply yesterday after the authority intervened again on Tuesday to support the Hong Kong dollar. 'People don't want to be the last one to take advantage of the Hong Kong dollar carry trade - that's why there was more upward pressure on short-term rates,' said Tim Condon of ING Financial Markets. The carry trade refers to investors borrowing in Hong Kong dollars at cheaper rates, and then investing the money in higher-return US dollar assets. The one-month Hong Kong interbank offered rate (Hibor) rose 29 basis points to 1.975 per cent yesterday. Since the beginning of the year the gap between one-month Hibor and the US equivalent has narrowed 154 basis points to 54.5 basis points. When this gap shrinks further - as it will if the liquidity in the interbank market continues to tighten - the pressure on banks to raise lending rates will grow, analysts say.