Rate outlook underpins confidence in HK economy

HONG KONG, March 27 (Reuters) Hong Kong is bracing for another interest rate rise this week but analysts believe the tightening cycle is nearly over and that bodes well for one of Asia's best-performing economies.

''We look at consumer spending and we see a lot of confidence,'' said Tai Hui, an economist at Standard Chartered Bank, which has raised its 2006 economic growth forecast for the territory to 6 percent from 4.8 percent.

''In the near term interest rates will peak and supply of new property will be tighter, supporting the property market and hence consumer spending.'' Hong Kong tends to track U.S. interest rate moves because of its currency peg to the U.S. dollar.

Financial markets are betting local banks will follow an expected quarter-point rise in benchmark U.S. interest rates this week and that another quarter-point increase in U.S. and Hong Kong rates in May will end the cycle.

Consumers appear upbeat.

The volume of retail sales rose a seasonally adjusted 2.1 percent in the three months through January compared with October-December, accelerating a recovery from a 0.5 percent dip in August-October after a series of rate rises took their toll.

Citigroup forecasts consumption will elp the economy expand 7.4 percent in the first quarter from a year earlier and it recently upgraded its 2006 gross domestic product forecast to 5 percent from 4.3 percent.

HSBC projects 5.5 percent economic growth this year, up from 4.8 percent previously. Long-term economic confidence has made domestic demand more solid than previously thought, it said.

WAGE BOOST Hong Kong was Asia's best-performing economy last year after China, growing 7.3 percent and building on a sizzling 8.2 percent expansion in 2004.

This year there is much uncertainty: an expected slowdown in U.S.

economic growth, unpredictable oil prices and the outside risk of an avian flu outbreak are all a concern.

But the domestic economy remains resilient.

A buoyant labour market pushed up private sector wages by more than 3 percent in the first two months of this year, the biggest increase since 1999, according to a survey by the Employers' Federation of Hong Kong.

''China is booming and that is certainly being felt in Hong Kong,'' said Tim Condon, chief economist at ING Financial Markets, which has raised its 2006 gross domestic product forecast to 5.5 percent from 5 percent.

As nominal interest rates stabilise, real rates will fall because inflation is picking up. That will boost property prices and create a wealth effect that will spur consumption, he said.

Investment bank CLSA disagrees. It sees another 100 basis point rise in U.S. rates this year, restricting Hong Kong's economic growth to 4.7 percent.

''Real interest rates will rise and that will curb investment and start squeezing discretionary spending,'' said Tony Nafte, senior economist at CLSA.

The U.S. consumer still has the ability to derail Hong Kong's export growth and undermine the economy if a cooling housing market prompts Americans to rein in spending.

But economists like Daniel Hui at JP Morgan said there are cushions to offset that.

''We are seeing strong business spending in the United States and headline inflation should come down as oil prices come down. That should boost household purchasing power,'' Hui said.

As in Hong Kong, robust employment growth is supportive of U.S.

consumption, economists said. Average hourly U.S. earnings rose by 3.5 percent last month from a year before -- the strongest increase in 4-{ years.

REUTERS SR KN1419