Hong Kong's mortgage interest rates have been steadily increasing over the past year, as indicated by spreads that have risen from around 0.1% above local overnight rates in April 2010 to 1.5-2% in May 2011. Several more increases are expected in the next year; some analysts believe that these could not only combat asset price inflation but might even cause property prices in the territory to fall by 10-15%-or even by up to 25%, according to some analyses. The Hong Kong government also plans to increase land supply to combat asset price inflation.

There is the growing possibility of a liquidity squeeze in Hong Kong, forcing an upward adjustment in commercial interest rates regardless of the level of official rates. Loans for use in Hong Kong rose by 27.6% in January-March, as a consequence of increases in both mortgage loans and corporate borrowing. However, the rise in renminbi-denominated deposits to Rmb451.4bn (US$69bn) at end-March, representing 7.7% of the total in the local banking system, is likely to continue, possibly reaching more than 20% by 2013. This could reduce the pool of liquidity available for lending in Hong Kong, as expectations of further renminbi appreciation make it unlikely these funds will be lent in the territory. Although total deposits in the Hong Kong banking system grew by 3.1% in the year to March, there was a 0.3% fall in Hong Kong dollar-denominated deposits, well below the pace of credit growth. The expected further increase in trade settlement using renminbi will also push up renminbi deposits.