The mounting financial crisis in the US could ease the upward pressure on Hong Kong's interbank rates, a new Citigroup report says.

The three-month Hong Kong Interbank Offered Rate (HIBOR), a gauge of Hong Kong banks' lending costs, won't go up too fast this quarter, the report says.

The bank revised down its forecast for the three-month HIBOR at the end of the third quarter to 2.4 percent from 2.65 percent. The rates were between 2.18 and 2.25 percent yesterday.

Joe Lo, an analyst for Citigroup, said the bank maintains its view that the Fed will start to hike policy rates in early 2009. And this, Lo said, will cause market interest rates, including the HIBOR, to rise more rapidly near the end of this year.

"We expect the Fed to hike policy interest rates by 125 basis points in 2009, and banks in Hong Kong will follow," he said.

Rate hikes, which mean a tighter monetary condition, will help curb Hong Kong's inflation, Lo added.

"A jump in inflation is bad news for Hong Kong consumers, who are facing sluggish employment growth and lower real wages," Lo said.

But he pointed out that the relief package by the government provides households with a cushion. And, he said, a less-rapid rise in the mainland's food prices may also reduce Hong Kong's imported inflation.

"Despite the surprisingly high inflation rate in June, we maintain our view that Hong Kong's inflation will not be out of control," Lo said.

The bank said the underlying inflation rate is likely to fall back to between 5 and 6 percent in the coming months.

A slowdown of the domestic economy, a stable US dollar, slowing renminbi appreciation and falling food prices will help stabilize Hong Kong's inflation, the report said.

Citigroup estimates the headline inflation rate will likely fall to 3 to 4 percent, thanks to the government's exemptions on public housing rents, waivers for property rates and an electricity-subsidies provision.

The bank's inflation forecast for this year remains at 4.4 percent.

(HK Edition 07/23/2008 page2)