DESPITE the substantial rate increase by the US Federal Reserve yesterday, bankers fear another rise may be on the cards early next year. But they are confident that the borrowing spree will not be softened. The Federal Open Market Committee (FOMC) raised the federal fund rate on overnight loans between banks to 5.5 per cent from 4.75 per cent and increased the discount rate to 4.75 per cent from four per cent. Under the linked rate system, Hong Kong's savings and lending rates are expected to follow suit after the weekly Friday meeting of the Hong Kong Association of Banks. The latest Fed tightening was the biggest this year - unlike its previous moves of 25 basis points (0.25 percentage point) or 50 basis points - suggesting the FOMC was alarmed about the strength of economic growth. It was reportedly the largest increase since the Fed increased the discount rate by a full percentage point in 1981. The Fed said the increases 'were taken against the background of evidence of persistent strength in economic activity and high and rising levels of resource utilisation'. 'In these circumstances, the Federal Reserve viewed these actions as necessary to keep inflation contained, and thereby foster economic growth,' it said. Accordingly, Citicorp and other major US banking companies pushed up the prime lending rate three-quarters of a percentage point to 8.5 per cent, the highest rate charged to consumers in more than three years. Yet, bankers in Hong Kong suspect the latest rate rise may mean the Fed has been caught off guard by the US economic growth since there is no hint that the rate's upward climb will be staved off for a while. After the Fed's August increase of 50 basis points, bankers said it had played down the possibility of further rises in the coming months but noted that no such hint accompanied the latest tightening. 'After the August rise, [Fed chairman] Alan Greenspan said there would be no more rises in the intervening months,' said Andrew Fung, manager, swaps and trading at HSBC Markets. 'He didn't this time - that's why you didn't have a strong rally in long-term bonds like last time.' In response, the Hong Kong Monetary Authority raised rates on its liquidity adjustment facility (LAF) - the rate at which it lends banks overnight money - by 75 basis points. It was the third time this year that the authority has raised LAF rates. Short-term rates in Hong Kong, which had previously factored in a 50-basis point increase, rose again. Three-month Hong Kong interbank offered rate (HIBOR) hit 5.83 per cent near the close yesterday, from 5.5 per cent on Tuesday, and one-month HIBOR rose 30 basis points to 5.3 per cent. Bankers reckoned a 0.75 percentage point increase on Hong Kong dollar savings rate should come as no surprise to the market. The monetary authority believed the rate rise would not have an adverse effect on the banking industry. 'Most of these rises fall within the market's expectations and bankers should have taken these into account in their planning,' said Joseph Yam Chi-kwong, chief executive of the monetary authority, the territory's central bank. The managing director of Dao Heng Bank Group, Kwek Leng Hai, agreed. He said: 'A local rate rise is expected to follow; we've even allowed for it in our budget and any impact will fall within our expectations. 'We'll have to be more careful about loans and will apply stricter screening on borrowers.' Higher rates serve as a mixed blessing for bankers. While borrowing activity may be dampened, depositors have stronger incentive to put their money in the banks. 'No doubt consumer lending may be curtailed because people have less to spend. But lending opportunities abound,' said Nam Lee-yick, executive director of Liu Chong Hing Bank. The airport-related projects, loan demand from China and the recent completion of several residential blocks exerted strong demand for funds, he said. On the deposit side, higher rates are expected to enhance the propensity to save. According to government statistics, time deposits rose faster than savings deposits, a result of repeated rate rises since March, reversing the trend of last year. While Hong Kong dollar savings deposits rose 15 per cent last year over 1992, the increase was slowed down to 6.6 per cent in the third quarter of this year, compared with the same period last year. However, Hong Kong dollar time deposits maintained their steady growth of about 41.9 per cent. The repeated rate increases, coupled with the deregulation of time deposits over one month in maturity, would further fuel the urge to place money with the banks. On the bond market front, instead of sparking a rally, the latest increase was 'just enough' to prevent a sell-off, Mr Fung said. He said he believed the FOMC - often criticised for being inflation 'doves' rather than 'hawks' - was alarmed by robust economic growth and might be waiting to see December US retail sales data before considering another tightening in January next year. The FOMC voted unanimously to lift the discount rate the same day US retail sales data showed their fifth consecutive monthly gain. 'That shows that everyone in the FOMC had been surprised by the pace of economic growth,' Mr Fung said. He predicted one-to six-month rates in Hong Kong could rise further. Oakreed Financial Services deputy managing director Mike Lai said the Fed had left its options open in terms of further tightening. 'That means the market remains a little bit nervous,' Mr Lai said. 'I think the pressure [for further tightening] is basically still there.' He predicted the market would rally a touch before resuming its previous bearish tone. Paul Au, deputy general manager of Bayerische Landesbank, said the bank's head office in Munich was looking at the effect of the rate rise on Bayerische's planned US$300 million to $500 million dragon bond issue. 'The timing has to be very important for the launch of the issue, but it's not for us to say here [whether the rate rise may delay the dragon]. It's for Lehman Brothers and our head office,' he said. However, the bank remained keen to raise money for the first time. In Europe, it was a frequent borrower, but its scarcity value in Asia would help pricing, he said.