Hong Kong interest rates stay put

HONG KONG (AFP): Hong Kong's banking cartel held its prime lending rate at 6.75 percent yesterday, declining to follow Monday's interest rate increase by the U.S. Federal Reserve.

At its weekly meeting, the Hong Kong Association of Banks saw no reason to change local rates because Washington's action had no real impact on the value of the Hong Kong dollar.

"There's been no significant movement in the Hong Kong dollar this week, so the linked exchange rate system hasn't been under pressure at all," the association's chairman, Paul Selway-Smith, told reporters.

The Hong Kong dollar has been pegged at 7.80 to the U.S. dollar for the last 10 years under a policy designed to build confidence in the British colony's 1997 handback to China.

The Fed, dreading inflation, on Monday brought up its short- term interest rates for the third time in as many months, by 25 basis points to 3.75 percent.

"Conditions here are pretty stable, and we found that there was really very, very limited justification for any change in rates," said Selway-Smith, who is also executive director of The Hongkong and Shanghai Banking Corp. Ltd.

Hong Kong last changed interest rates on March 25, bringing the prime up one-quarter of a percentage point after ignoring the first of what has become three Fed increases so far this year.

Savings rates went up at the same time, with one-year term deposits paying 4.5 percent, up 75 basis points.

For the thriving territory, where year-on-year inflation yesterday was reported by the government at eight percent, that was the first change of rates since July 1992.

Fears of rising interest rates triggered a four-day sell-off on the Hong Kong stock exchange this week, led by interest- sensitive property issues, before bargain-hunting pushed the Hang Seng Index back up yesterday to 9,156.85.

Selway-Smith acknowledged that because of the U.S. dollar peg, Hong Kong's policy was to "broadly follow" the Fed -- but not necessarily to act in lock-step.

"It doesn't mean to say that if they move another one-quarter of a percent that we are going to move, but it's very fine tuning," he explained.