Lenders urged to make up their minds as US rate rise looms on the horizon Although just about everyone expects the United States Federal Reserve to raise interest rates this week, Hong Kong lenders have yet to decide whether to match such a decision. Local banks did not follow last month's US rate increase as there was ample liquidity in Hong Kong's banking system, with little sign of capital flight despite volatility in the equity markets. However, there are concerns that if banks ignore another Fed rate increase, the larger rise that would eventually be needed to catch up could deal borrowers and the stock market a shock. The federal funds rate is almost certain to rise another 25 basis points after the Federal Open Market Committee completes its meeting on Friday morning. Peter Wong Tung-shun, executive director of Hong Kong and Shanghai Banking Corp, agreed there was room for banks not to raise interest rates. However, if lenders did not follow the Fed's lead this time, catching up later could be painful, he said. Because of the local dollar's peg to the US currency, Hong Kong rates cannot afford to stray too far out of step with US rates. 'We need to strike a balance,' Mr Wong said. Similar concerns were voiced last week by William Ryback, deputy chief executive of the Hong Kong Monetary Authority, who said that the amount of liquidity in the market was not the only factor that lenders needed to consider. 'The longer you are away from the US rate, the sharper the rebound may be down the road,' Mr Ryback said. Hang Seng Bank vice-chairman and chief executive Raymond Or Ching-fai said it was too early to predict what his bank would do if the Fed tightened again. 'Since the markets have been so volatile recently, we have to see what the situation is like before we make any decision,' he said. Mr Or said it was also important for Hong Kong banks to consider whether the next one or two US rate rises would be perceived as the peak of the interest rate cycle. He did not share some market observers' view that the Fed might try to put a cap on speculation about further rises by raising rates 50 basis points instead of 25 this week. 'A rise of 0.5 percentage point would have a great impact on equity markets,' Mr Or warned. He expected US rates to go on hold after a further rise in August. However, Sunny Cheung Yiu-tong, head of consumer banking at DBS (HK), said local banks were likely to increase their prime lending and savings deposit rates 0.25 percentage point. Mr Cheung said the Hong Kong dollar exchange rate had weakened recently, mainly because local rates had not followed US rates higher. 'If we do not match US interest rate moves, eventually more people will sell Hong Kong dollars and buy US dollars. This will push up Hong Kong interbank rates.' To be competitive lenders would want to see whether the biggest banks, especially HSBC, followed the US trend, he said. Prime lending rates at HSBC and its subsidiary Hang Seng stand at 8 per cent, 0.25 per cent below their local peers.