The difference in the pace of interest-rate increases between Hong Kong and the United States is only temporary and will return to normal eventually, according to Hong Kong Monetary Authority chief executive Joseph Yam Chi-kwong. Smaller lenders such as Wing Lung Bank and Fubon Bank yesterday followed the move of larger competitors to raise their prime lending rates 50 basis points. The increases were prompted by the US Federal Reserve lifting its short-term fund rate by 25 basis points last week. It was the second time this year that Hong Kong banks had raised the prime rate by twice as much as corresponding US rate rises. 'It simply reflected that the discount banks made on mortgage terms over the last few years was too big compared to the reduction in prime rate,' Mr Yam said. 'That is why we are seeing a larger increase in prime rate [over US rates] at the moment. It'll eventually go back to normal, but it'll take time.' Between the third quarter of 2003 and late last year local lenders chose not to follow US interest-rate direction several times, largely due to the unusually high liquidity in the banking system. DBS Bank managing director Sunny Cheung Yiu-tong said Hong Kong banks would begin following the Fed's rate moves more closely as the interest-rate environment entered a normal period. 'In the past, Hong Kong banks have always matched the rate rise of the US and that was interrupted for a while,' Mr Cheung said. 'From now on, as long as the Hong Kong interbank offered rate (Hibor) stays close to its corresponding US rate, things will likely go back to normal.' With the exception of HSBC, Hang Seng Bank and Bank of China, which set prime rates 25 basis points lower, all major lenders have prime at 6.5 per cent. 'With prime at 6.5 per cent, some existing mortgages are being charged an effective rate of 3.7 per cent. If you take that against the current Hibor of about 3.5 per cent, the profit margins for some banks are still quite low,' Mr Yam said. 'But for banks whose fund sources come mainly from deposits, then the situation is different. That's why we emphasise it will be more practical for banks to decide their own mortgage rate according to fund cost.'
