20000210

HK banks seen lifting rates on Fri, impact limited

HONG KONG: Hong Kong banks are expected to raise key interest rates on Friday to prevent capital outflow amid growing conviction that waning deflation would limit any adverse effed they expected the Hong Kong Association of Banks (HKAB) to lift deposit rates by a quarter percentage point to 4.0 percent after its weekly meeting on Friday.

Major Hong Kong banks were expected to follow the HKAB by raising their prime lending rates.

"I think the impact would be pretty limited. It's widely expected by the financial markets," said Kevin Chan, head of greater China economic research at Nomura International.

If the HKAB didn't raise rates, the territory would risk further capital outflow due to the US dollar-Hong Kong dollar currency peg.

Institutions would prefer to hold US dollars over Hong Kong dollars as US interest rates were higher after the Federal Reserve tightened by 25 basis points last week, the Fed's fourth such hike in seven months.

The HKAB had raised rates only once during that time and major US banks now quote prime lending rates at 8.75 percent compared to Hong Kong banks' 8.50 percent.

BANK LIQUIDITY TIGHTENS

Local interbank liquidity has tightened significantly. The aggregate balance of banks' Hong Kong dollar clearing accounts at the Hong Kong Monetary Authority stood at minus HK$299 million on Wednesday, the first time it entered negative territory this year and compared to a flush HK$7.9 billion in early January.

Short-term interbank rates have firmed and were now trading at par to a slight premium over US counterparts, compared to a heavy discount earlier this year.

"Unless the balance returns to positive, the HKAB will most likely raise rates on Friday," said the treasurer of a US bank in Hong Kong. But he noted that Hong Kong stocks had soared on Wednesday morning, which meant hot money was still staying in the territory. The blue chip Hang Seng Index .HSI ended the morning up 4.12 percent at 16,897.06 points as institutions continued to pile into China Telecom (Hong Kong) Ltd and technology stocks.

LIMITED IMPACT ON RECOVERY

Economists said higher nominal rates would have a minimal impact on economic recovery because real interest rates broadly defined as nominal rates minus inflation were still expected to fall this year due to waning deflation.

Real interest rates had skyrocketed last year after prices tumbled in order for Hong Kong to regain competitiveness. Investment expenditure remains very weak, even though exports and private consumption have staged a robust turnaround.

Chan said he expected the composite consumer price index, Hong Kong's broadest measure of inflation, to rise two percent in 2000 compared to a four percent decline in 1999.

He said this 600 basis point improvement in real interest rates was more than enough to counter Nomura's house forecast of a 50-75 basis point rise in nominal rates this year.

Experts also noted that banks were likely to keep retail rates, such as tax loan and mortgage loan rates, low because total loan growth was still declining at double-digit rates.

Merrill Lynch's Sadiq Currimbhoy said in a recent research report that Hong Kong dollar long deposit ratios were at historical lows and Hong Kong was running a current account surplus of nearly one percent of gross domestic product.

But the report noted: "However, should US rates rise enough to scuttle domestic demand recovery by raising the return to cash greatly, then Hong Kong's outperformance may slow."-Reuters