The US Federal Reserve may cut rates by as much as 125 basis points this year if the credit market remains tight, say analysts, who believe that could in turn bring Hong Kong's prime lending rates down to as low as 5.5 per cent. A report by Citi said Hong Kong banks were expected to cut their prime rates and mortgage rates by at least 75 basis points in the first half. 'The US may cut rates as much as 125 basis points this year, if the credit market sees no further improvement and is unresponsive to the Fed's efforts,' said Joe Lo, an economist at Citi. However, he said there was some sign of slight improvement in US credit markets recently. Hong Kong has two prime lending rates. For the three largest banks, the rate is 6.75 per cent; for the others, it is 7 per cent. These prime rates could fall to 6 per cent and 6.25 per cent if Hong Kong banks match US rate cuts of 75 basis points, or to 5.5 per cent and 5.75 per cent if local banks follow a 125 basis point reduction. Mortgage rates, which stand at about 4 per cent, could fall to as low as 3.25 per cent with a 75 basis point reduction and 2.75 per cent with a 125 basis point cut. Mr Lo said that lower interest rates would sustain Hong Kong's domestic economic boom by offsetting weaker external demand due to the downturn in overseas markets. HSBC also expected a further 100 basis point cut in Hong Kong's prime lending rate. 'It's hard to predict whether a US interest rate cut could be as much as by 125 basis points. It depends on US economic conditions,' said Andrew Fung Hau-chung, a deputy general manager at Hang Seng Bank. 'But the interest rate downtrend will continue.' Mr Fung said there was pressure on the United States to slash its fed fund rate 50 basis points at the Open Market Committee meeting this month because weaker than expected economic data released last week had raised worries about a recession. Daniel Chan Po-ming, senior investment strategist at DBS Bank (Hong Kong), expected a 25 basis point cut in the fed fund rate this month, followed by another 25 basis point cut in March. Market participants expect further rate cuts as evidenced by fed fund forward contracts, which show US interest rates could fall to as low as 3 per cent in September. However, Mr Chan said whether Hong Kong banks followed immediately or matched the cuts would be determined by market liquidity. This depends on the interest rate situation after the Hong Kong Monetary Authority issues an additional HK$6 billion Exchange Fund paper, as well as on capital inflows. Mr Chan said Hong Kong was likely to see negative mortgage rates as inflation was expected to rise further during the interest rate cut cycle. 'The property market will remain active,' he said, but that the rise in prices would vary among different property sectors. Citi expected Hong Kong's inflation rate to rise to as much as 4 per cent to 5 per cent this year if the government did not introduce any fiscal measures to contain pressures.