UPDATE: HKMA Chief: Hong Kong Banks' Interest Rates May Rise Earlier Than US Policy Rate

Hong Kong Monetary Authority Chief Executive Norman Chan said Thursday local banks' interest rates may rise earlier than the benchmark rate in the U.S., amid strong demand for loans in the territory.

Chan's comment came after the U.S. Federal Open Market Committee's decision overnight to leave its policy rate unchanged. The de facto central bank in Hong Kong kept its base rate at 0.50% Thursday, in lock-step with the Fed's decision, as the city's currency peg to the U.S. dollar bolts its monetary policy to that of the U.S.

Major local lenders, namely the Asian unit of HSBC Holdings PLC, Hang Seng Bank Ltd. (0011.HK) and BOC Hong Kong (Holdings) Ltd. (2388.HK), all decided Thursday to keep their prime lending rates unchanged at 5.00%.

Chan said at a news briefing that strong loan demand in Hong Kong since last year has already prompted local banks to raise deposit and lending rates, and he believes the uptrend will continue.

He added the upward pressure on the territory's interest rates will grow once the FOMC raises its benchmark rate, which will trigger carry trades and liquidity outflows from Hong Kong.

"I expect the HK$640 billion of funds that flowed into Hong Kong during the end of 2008 and 2009 will gradually drain away from the territory when the U.S. enters a rate hike cycle," he said.

Total lending in Hong Kong jumped 29% last year to HK$940 billion, according to HKMA data, helped by strong demand from mainland China firms amid the government's monetary tightening efforts. In the first two months of this year, total lending grew at an annualized rate of 26%, Chan said earlier this month.

"With solid loan demand from mainland China companies, banks have realized that they don't have to compete with cutthroat rates for mortgage loans in the city," BWC Capital Markets chief economist Daniel Chan said, adding he expects mortgage rates to climb 10-20 basis points further in next few months.

Mortgage rates haven risen from levels of less than 1% a year for some adjustable-rate loans to approximately 1.5 percentage points above the Hong Kong interbank offered rate. In mid-April, HSBC raised rates on certain mortgage loans for new customers, while other major banks have also hiked mortgage rates since last month.

Even with higher rates, economists say the city's property market, which has been fueled in part by cheap credit, is unlikely to cool in the near term given the continued demand from mainland property investors who don't need to borrow funds to buy multi-million dollar assets.

In the latest sign of strength in the local property market, a joint venture owned by unlisted property developer Nan Fung Group and Wing Tai Properties Ltd. bought a prime residential site for HK$1.525 billion Wednesday in the first public land auction held this fiscal year. The result was higher than the average HK$1.28 billion forecast of seven analysts and surveyors polled earlier by Dow Jones Newswires.

The higher-than-expected total came despite the government's efforts to cool the overheated market.

-By Fiona Law, Dow Jones Newswires; 852-2802-7002; fiona.law@dowjones.com

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