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SCMP Reporter

HONG KONG share prices are expected to fall tomorrow and borrowing costs to begin climbing after the United States raised its interest rates for the first time in five years.

  The US Federal Reserve said on Friday it would raise the key short-term Federal funds rates by 0.25 of a percentage point to 3.25 per cent.

  The announcement sent Wall Street tumbling and the reverberations are expected to be felt around the globe this week.

  The move is seen as an important signal to equity markets worldwide that the cycle of US interest rates has finally turned up.

  Lending rates in Hong Kong could follow suit but bankers are divided on whether the US increase is enough to push rates up here.

  Although the US increase is small, the symbolic impact for the international equity markets - where share prices performed strongly because of the low rates last year - is significant.

  A new trend has been established and the impact will be felt immediately in the Hong Kong money markets. Overnight and other short-term rates are expected to increase early this week but it is not certain the prime rate, which at 6.5 per cent is already above the US equivalent, will follow.

  An official statement released by the Hong Kong Monetary Authority (HKMA) said: ''We would expect Hong Kong dollar interest rates to follow in terms of general direction, although the pace of change will depend on local market conditions.''   David Carse, deputy chief executive of the HKMA, said later: ''I would expect interest rate increases to feed through reasonably quickly, but that depends on domestic monetary conditions.''   He would only say the likely rise in prime bank rates would be ''in the short term''.

  Standard Chartered Bank treasurer Stanley Wong expected the Hong Kong Association of Banks to raise the deposit rate by 0.25 per cent when it met this Friday.

  Its main considerations would be inflation and the over-heated property market, rather than the need to maintain the value of the Hong Kong dollar against the greenback, he said.

  ''The exchange rate against US dollar, at 7.725, has remained stable over the past few months, which makes other factors more important in the association's decision,'' he said.

  Mr Wong predicted Hong Kong's money market would firm up and there would be some short coverage activities in the coming week, probably leading to a 0.25 per cent rise in the interbank rate.

  Higher rates in the territory would help cool the property market but the net effect was likely to be limited, given the relatively modest increase in lending rates, analysts said.

  Hong Kong follows the US interest rate levels closely because the Hong Kong dollar is pegged to the greenback.

  If interest rates here were to diverge too much from those in the US, movements in money market funds would quickly pressure the exchange rate.

  In the short term, the strength of the Hong Kong dollar resulting from the continued inflow of international capital to the stock market would mean no increase in rates was necessary, said Ian Perkin, chief economist at the Hong Kong General Chamber of Commerce.

 Jim Wong, chief economic adviser to the Hongkong Bank, said he thought the 0.25 per cent increase was not significant, although it would help fight inflation.

  He said more increases in the US base rate were inevitable, pointing to the gap between short-term US interest rates, now at 3.25 per cent, and the six per cent US Government long bonds were yielding.

   He said the resurgent US economy would fuel inflationary expectations and could prompt the Fed to further raise interest rates.

  However, brokerage Jardine Fleming saw little possibility of the US further increasing interest rates this year, given that inflation was only 2.5 per cent and there were fears of choking the developing recovery.



HK shares to fall after US lift interest rates