Composite Interest Rate : End-May 2006

The Hong Kong Monetary Authority (HKMA) announced today (Monday) the composite interest rate at the end of May 2006.¹

The composite interest rate, which reflects the average cost of funds of banks, increased from 3.10% at the end of April 2006 to 3.39% at the end of May 2006 (see Chart 1 in the Annex). This followed a rise of 10 basis points in the composite interest rate in April 2006. The increase of 29 basis points in the composite interest rate in May 2006 reflected upward interest rate adjustments for customers' time deposits and short-term interbank funds, which were mainly due to the Initial Public Offering (IPO) of Bank of China which tied up funds of HK$ 274 billion in the later part of the month, causing a tightening of short-term interbank liquidity (see Chart 2 in the Annex).²,³ The subscription monies amounted to about 12% of customer deposits with banks in the period. As a result, short-term interbank rates rose significantly, with interest rates for overnight and one-week interbank funds rising by more than 40 basis points, while longer term interbank interest rates remained steady.⁴ This also resulted in upward adjustments in time deposit rates. Nevertheless, as the application monies were refunded to applicants who were not allotted shares in early June, short-term interbank interest rates have eased, with overnight and one-week interbank rates falling to their pre-IPO levels by over 100 basis points in the second half of June.

"Since the commencement of the current up-cycle of US interest rates from the middle of 2004, the composite interest rate has increased by 315 basis points, broadly in line with upward adjustments of between 300 basis points and 325 basis points of the best lending rates of banks. The increase in the average cost of funds in May was mainly due to a temporary tightening of short-term liquidity as a result of the application for the IPO of Bank of China," said Mr Peter Pang, Deputy Chief Executive of the HKMA.

The historical data of the composite interest rate from the end of the fourth quarter of 2003 to the end of May 2006 are available in the Monthly Statistical Bulletin on the HKMA website (www.hkma.gov.hk). The next data release is scheduled for 19 July 2006 and will provide the composite interest rate at the end of June 2006.

For further enquiries, please contact:
Ying-ying Cheng, Manager (Press), at 2878 1687 or
Hing-Fung Wong, Resource Co-ordinator, at 2878 1802

Hong Kong Monetary Authority
19 June 2006

¹ The composite interest rate is a weighted average interest rate of all Hong Kong dollar interest bearing liabilities, which include deposits from customers, amounts due to banks, negotiable certificates of deposit and other debt instruments, and Hong Kong dollar non-interest bearing demand deposits on the books of banks. Data from retail banks, which account for about 90% of the total customers' deposits in the banking sector, are used in the calculation. It should be noted that the composite interest rate represents only average interest expenses. There are various other costs involved in the making of a loan, such as operating costs (e.g. staff and rental expenses), credit cost and hedging cost, which are not covered by the composite interest rate.

² During the period, HIBORs increased for funds with maturity of overnight and one week by 40 and 41 basis points, between 4 months and 12 months by 3 to 9 basis points, while that for funds with maturity between 1 month and 3 months dropped by 1 to 10 basis points.

³ The IPO period for Bank of China was between 18 May and 23 May with the refund date on 1 June.

⁴ During the period, HIBORs for funds with maturity longer than 3 months rose by 3 to 9 basis points.

Annex

Chart 1

^*End-of-period figures.

Chart 2

^*End-of-period figures.