Over the past few weeks, we have heard a series of increasingly shrill warnings that Hong Kong mortgage rates are about to start rising. Two factors are feeding these fears. First, expectations are growing that the United States will begin raising interest rates in the new year as the American economy stabilises. With our currency pegged to the US dollar, higher US rates will push up the cost of local home loans, bankers warn. Then, reinforcing those worries, we have the Hong Kong Monetary Authority, which recently ticked off local banks saying they may be offering borrowers excessively low mortgage rates in their desire to win lending business away from competitors. The combination sounds ominous, and concerns about rising mortgage rates were even blamed for slackening mass-market sales last month. Yet, despite the mounting fears, prospective borrowers need not be overly concerned about a significant increase in home loan costs. For a start, given the weakness of the American economy and the absence of inflationary pressure, it is highly unlikely that the Federal Reserve will rush into early rate rises. Economists at Goldman Sachs believe US interest rates will remain on hold until at least the end of next year. And even if the Fed does begin jacking up its target rate before then, it is far from clear that Hong Kong mortgage rates will automatically follow. These days, fewer Hong Kong mortgages are being set in relation to the traditional benchmark of bank prime lending rates, which tend to move in lockstep with US interest rates. Instead, more and more are being priced against Hong Kong interbank offered rates, the rate at which Hong Kong's banks lend to each other in the wholesale money markets. As the first chart below shows, right now, the three-month Hibor rate is at rock-bottom levels. Yesterday, it was quoted at just 0.21 per cent, more or less in line with the benchmark short-term US interest rate. Traditionally, when US rates rose, traders would take advantage of the resulting differential by borrowing in Hong Kong dollars at Hibor in order to lend out the money in US dollars at the higher rate. The arbitrage would soon send Hibor back into line with US rates. But as Goldman economist Enoch Fung points out, the mechanism doesn't work as effectively as it used to. That's partly because there is less appetite around today for the leverage associated with arbitrage trades than there was before the credit crisis. But even if opportunistic traders were to seize the arbitrage opportunity, there is so much excess liquidity in the local financial system it is likely that Hibor would barely move. As central banks have flooded the world with liquidity over the past year, money has poured into Hong Kong, originally as a safe haven in the crisis and more recently as a play on high growth on the mainland. As a result, Hong Kong's monetary base has ballooned. As the second chart below shows, the combination of notes and coins in circulation, banks' cash balances at the HKMA, and the amount of outstanding Exchange Fund bills and notes (which banks can post as collateral with the HKMA for short-term funds) has more than doubled to over HK$800 billion since the beginning of the credit crisis. That increase in funds represents a massive reservoir of liquidity, which is likely to keep Hibor down even when US rates start to rise. And if Hibor remains low, so will mortgage rates linked to Hibor. And with banks sitting on far more in deposits since the start of the credit crisis than they comfortably lend out (see the third chart), competition between the banks to make relatively secure mortgage loans is set to remain intense for the foreseeable future, also helping to keep mortgage rates low. As a result, fears that home loan costs are going to head higher over the coming months look distinctly overblown.