More Hong Kong banks joined the bandwagon to raise interest rates yesterday, one day before the Fed's meeting to decide the rate movement.

Big banks, including HSBC and BOC Hong Kong, decided on Friday to increase the prime lending rate by 25 basis points to 5.25 per cent and standard savings rates by 24 basis points to 0.25 per cent. Banks such as Dah Sing Bank, MEVAS Bank and CITIC Ka Wah Bank, followed suit yesterday.

Their move was made prior to the meeting of US Federal Reserve's policy-setting committee which is expected to hike its benchmark interest rate by another 25 basis points today to 2.75 per cent.

Local banks are unlikely to follow the US move after Monday's hike.

"If we raise interest rates on Monday and we raise the rate again on Tuesday or Wednesday, I think it is very unlikely to happen," HSBC General Manager Raymond Or said.

"Unless the increase of (Fed rate hike) is more than the market anticipated or the tone in the comments (in the post-meeting statement) is different from the previous one, I don't think Hong Kong banks have to follow."

And Joseph Yam, chief executive of the Hong Kong Monetary Authority, said the recent rate movement might not signal the start of an interest rate hike cycle.

The market is still watching the trend of the renminbi and US dollar exchange rates, Yam said.

There is some concern on the possibility of a return of hot money into Hong Kong, according to Yam.

Hong Kong banks have largely ignored six interest rate rises since last year under the intense lending competition and abundant liquidity in the banking system.

Hot money flowed in last year, betting on the appreciation of renminbi, but speculation has been fading after the mainland kept denying the possibility of an imminent change. The aggregating balance in the banking system dropped by nearly half from HK$9.3 billion in early February to HK$4.85 billion on Friday.

But under the currency peg system, the comparatively low interest rates of the HK dollar are expected to catch up.

Investment bank CSFB forecasts that the prime rate could raise to around 6 to 6.5 per cent at the end of the year in order to fend off the escalating capital outflow and the three-month interbank bank rate could also increase up to 2.9 per cent.

The three-month interbank rate was quoted at 2.34-2.37 per cent at 8:20 GMT yesterday, while the overnight rate was quoted at 2.06 per cent in late trade after hitting 2.20 per cent. The local currency firmed to 7.7983 per US dollar before settling at 7.7991/92 at 0827 GMT, but was still higher than 7.7995/96 in late Asian trade on Friday.

"The interest rate differential between the Hong Kong dollar and the US dollar has narrowed, so arbitrage traders are becoming less attractive and also promoting some players to unload US dollar positions", said a dealer from French Bank as quoted by Reuters.

Source: China Daily/Hong Kong Edition