Pushed by a recent surge in interbank funding costs, Hong Kong banks have decided not to wait for the US Federal Reserve and have raised their best lending rate by a quarter percentage point to 5.25 percent.
Standard Chartered PLC announced Saturday that it will hike rates, following the lead of Hong Kong's largest bank, HSBC Holdings PLC.
HSBC's move Friday was already matched by other major lenders including Bank of East Asia Ltd., Hong Kong's fourth-largest, and the locally listed unit of Bank of China, BOC Hong Kong Holdings Ltd.
Starting Monday, the prime lending rate at all those banks will be 5.25 percent, up from 5.00 percent. The benchmark interest rate paid on savings deposits will rise to 0.25 percent from 0.01 percent.
Hong Kong's prime rate is still below the United States' 5.50 percent. But the increase is significant, because Hong Kong's prime rate held steady through the US Federal Reserve's series of six interest rate hikes beginning in mid-2004.
That situation was unusual -- Hong Kong's monetary policy tends to follow that of the United States, because the Hong Kong dollar is pegged at a rate of 7.8 to one US dollar.
Hong Kong banks were able to leave their lending rates unchanged during the US rate hikes because of weak lending activities, keeping interbank rates near zero.
But an HSBC spokeswoman told Dow Jones Newswires on Friday that the bank is raising rates now because the large amount of money circulating in the local banking system has dropped substantially, and "interbank rates have gone up sharply."
On Friday, the overnight Hong Kong interbank offered rate was quoted at over 2 percent, compared to 1.35 percent at the beginning of the week. Higher interbank rates have been cutting into banks' profit margins, and an increase in the prime rate had been widely expected.
Most analysts expect Hong Kong interest rates to return to their usual pattern of closely following those in the United States. Not only are banks here likely to match future US interest rate increases, but they may need to make up for some of the ground they've lost by keeping rates unchanged for so long.