Bankers say Hong Kong lenders will keep their current interest rates unchanged following the United States central bank's announcement Tuesday that borrowing interest will remain at 2 percent as inflation continues to threaten the economy.

Stanley Wong, director and deputy general manager of ICBC (Asia), said that Hong Kong banks will follow the US Federal Reserve (Fed) in making no change.

In keeping the benchmark interest rate at 2 percent, the Fed signaled that weak employment rates and financial instability will delay any increase in borrowing costs.

"Economic activity expanded in the second quarter, partly reflecting growth in consumer spending and exports. However, labor markets have softened further, and financial markets remain under considerable stress," the monetary authority said in a statement on its website. "Tight credit conditions, the ongoing housing contraction, and elevated energy prices are likely to weigh on economic growth over the next few quarters."

ICBC (Asia), the Hong Kong operation of the country's largest lender, Industrial and Commercial Bank of China (ICBC), will likely keep the current prime lending rate of 5.5 percent unchanged in the coming months.

"The US is unlikely to make any adjustment for the rest of the year, and there is no reason for Hong Kong to make any change either," Wong said. "Inflation in the city is still very high."

The prime lending rate of banks in Hong Kong is between 5.25 and 5.5 percent now.

"When it comes to rate hikes, the bigger banks always make the first move, and I haven't heard anything about it; our bank will stick with the current rate," said Law Ka-chung, chief economist and strategist at Bank of Communication.

This was the second time in two months that the Fed decided to stick with the same rate level. The US central bank said in June that it would leave base rates unchanged as the economy's growth stagnates. In response to the announcement, Hang Seng Bank, HSBC, and Bank of China (Hong Kong) also indicated their 5.25 percent prime rate will remain unchanged.

Given that the Hong Kong dollar is pegged to the US dollar, banks in the city consider the moves of the Fed in deciding whether to change rates.

Since the beginning of the year, the prime lending rate charged by Hong Kong banks has decreased 150 basis points to follow their US counterparts.

Deposit rates have also fallen to just 0.01 percent in savings accounts and 2.35 percent for a 12-month-term deposit.

Inflation, by comparison, has climbed from 3.2 to 6.1 percent as of the latest calculation.

As a result, many investors have taken to shifting their local currency into yuan deposits to hedge the depreciation risk.

Figures from financial databank CEIC Data show that yuan savings in Hong Kong increased by 48 billion yuan in the five months from November through March.

And as of the end of May, yuan deposits in the city had reached 77.68 billion yuan, almost three times the 26.16 billion yuan seen at the same time last year, and 87 times the 895 million yuan seen when licensed banks began offering yuan-deposit services in February 2004, data from the Hong Kong Monetary Authority shows.

(HK Edition 08/07/2008 page2)