The gap between United States and Hong Kong short-term interest rates continued to drive arbitrage demand for greenbacks yesterday and forced the Hong Kong Monetary Authority to step in and buy its own currency three times in less than 24 hours. The purchase of a total $1.31 billion would reduce the liquidity in the banking system - as measured by the aggregate balance - to $4.35 billion, which would put further upward pressure on interbank rates and increase the likelihood of an imminent rise in Hong Kong lending rates, observers said. The aggregate balance has fallen from $15.78 billion at the beginning of the year. At the same time, Hong Kong interbank rates have shot higher. This has resulted in a significant narrowing of the interest gap against US rates. 'Hong Kong players are seeing the interest-rate differential as an endangered species that is rapidly disappearing and want to take advantage of it while they can,' said Tim Condon, the head of financial markets research at ING Financial Markets. The outflow of Hong Kong dollars was slightly less this week than the previous week, partially reflecting the fact that the potential gain from a short-term switch into US dollars is decreasing. 'But there is still some interest,' said Tommy Ong, the vice-president of treasury and markets at DBS Bank. 'Since the pressure of a yuan appreciation is not that great at the moment, you are almost guaranteed an interest-rate gain.' The HKMA bought $538 million after the Hong Kong market closed yesterday after picking up $780 million in London trading late on Tuesday. This compared with $2.41 billion the previous Wednesday and $1.32 billion on March 1. The one-month interbank rate rose to 2.01 per cent yesterday from 1.89 per cent on Tuesday, while the three-month rate increased to 2.26 per cent from 2.2 per cent.