THE initial phases of deregulating time deposits will not lead to a significant lifting of interest rates but will promote competition in the banking industry. The first few stages of removing the caps on time deposits other than the 24-hour call deposit will have only mild impact on the banking sector because the interest rate differential between long-term deposits and the interbank money market rate is quite narrow. ''For instance, the three-month time deposit is 4.75 per cent today and the interbank market rate for funds of the same maturity this morning was 4.875 per cent,'' said Paul Selway-Swift, chairman of the Hong Kong Association of Banks. He said the liberalised time deposit rates were not likely to exceed the interbank rate, which is the rate banks lend out their money. A small differential meant that rates would not shoot up significantly. But he added that the extent to which rates went up would depend on the individual bank's appetite for funds and how transaction-intensive the deposits were. The Hong Kong Monetary Authority's deputy chief executive for banking, David Carse, reckoned that freeing the time deposit caps would promote competition among banks. While admitting that banks were already competing fiercely for deposits with above market rates, particularly the small and medium-sized banks, he argued that it was healthy for them to compete for smaller deposits. ''The large deposits tend to be more lumpy and are liable to be withdrawn to look for higher rates,'' Mr Carse said. Besides, time deposits with long maturities are often substituted by swap deposits which offer higher rates since the latter are not governed by the interest rate rules. A swap deposit account, available for deposits as low as $3,000 with a maturity as short as seven days, further diminish the likely impact of deregulation. Furthermore, time deposits only amounted to $37 billion, accounting for 4.1 per cent of the total Hong Kong dollar deposit base. Nevertheless, the differential between 24-hour call deposit and the money market rate is much larger, meaning that banks can have ample room to put up the rates once deregulated. ''The savings rate is three per cent and the overnight rate in the interbank market today was 4.5 per cent,'' Mr Selway-Swift said. Concern has been expressed by bankers of a possible migration from savings and demand deposits to 24-hour call deposits and a subsequent destabilising impact on the sector. The worry led to suggestion for the 24-hour deposit to be excluded from the net of deregulation. ''Finally, it was decided to include the 24-hour call deposit based on the Government's response to the Consumer Council report,'' said Mr Selway-Swift. As such, the time for deregulating time deposits has not been fixed and is subject to the result of a review on the initial phases conducted by the Monetary Authority in conjunction with the bank association. The authority would conduct a monthly survey for information relating to the amount in each deposit category and the interest rates paid on those deposits. Charting the deposit movements based on the survey findings, the authority and the association would decide how to move on to further stages on demolishing caps of the 24-hour deposit.