Banking chief Benjamin Hung warns of 'turning point' in interest rates

Hong Kong's banking association has warned that the risk of higher interest rates will rise as the US economy improves and the Federal Reserve links the unemployment level with its short-term interest rate policy.

The Hong Kong Association of Banks (HKAB) said people should be aware of a "turning point of policy" even though they have become used to the record-low interest-rate environment over the past five years.

The unemployment rate in the US serves as a tangible measure for those monitoring the timing of policy change, said Benjamin Hung Pi-cheng, the banking association's newly elected chairman who is also the chief executive of Standard Chartered in Hong Kong.

Hung said the US unemployment rate had eased to about 7.7 per cent from 10 per cent in October 2009, not far from the pre- crisis level of 6.5 per cent. The US Federal Reserve said it did not expect to change its interest rate policy until it saw the unemployment rate drop to 6.5 per cent or lower. But many economists and analysts fear the Federal Reserve could lift rates before 2015.

The Fed forecast the jobless rate to drop to between 6 per cent and 6.5 per cent by 2015. In the face of a potential change in interest-rate policy, Hung said the impact on mortgage borrowers would be higher than investment-related lending because the increase in repayments had a direct affect on the monthly income of homeowners.

He also suggested that corporate borrowers could tide over their current interest rate with a swap or change their policy to fixed rates from floating rates to help minimise the risk of an increase. Hung expects outstanding mortgage loans in Hong Kong to rise by 5 to 10 per cent this year, primarily driven by home up-graders, aand predicts a slight moderation in property prices.