May 2 (Bloomberg) -- HSBC Holdings Plc may refrain from cutting its Hong Kong benchmark lending rate today, diverging for the first time in two years from the direction of the city's central bank as it tries to preserve loan margins.

HSBC is ``likely'' to avoid reducing the so-called best lending rate from 5.25 percent, Executive Director Peter Wong said in Hong Kong today. The London-based bank has cut borrowing costs by 2.5 percentage points since September, tracking rate reductions by the U.S. Federal Reserve and Hong Kong's de facto central bank.

With deposit rates already at almost zero, a cut by HSBC would erode lending profitability in a city where total bank loans jumped 19 percent in March from a year earlier. HSBC's net interest margin in Hong Kong fell to 2.27 percent last year from 2.29 percent in 2006.

``In Hong Kong, there is limited room for deposit rates to go down further, and this will affect lending rates too as banks try to maintain the spread,'' Hong Kong Monetary Authority Chief Executive Joseph Yam said today.

The Hong Kong Monetary Authority lowered its base rate for overnight lending to 3.5 percent today after the Fed, trying to avert a recession in the world's largest economy, cut its benchmark rate for the seventh time since September.

HSBC is expected to announce a decision on whether to cut its Hong Kong lending rate today. The bank's Hong Kong-traded shares rose 1.3 percent to HK$136.80 at 11:32 a.m. local time.

`Limited Room'

HSBC and its Hong Kong rivals cut the interest they pay on deposits of at least HK$150,000 ($19,000) to 0.01 percent during the last reduction in March.

The three-month Hong Kong Interbank Offered Rate, used as a benchmark for corporate borrowing, slipped to 1.93 percent today from 2.08 percent on April 30. It has climbed from 1.73 percent on March 20, the last time Hong Kong banks trimmed rates.

``Rates in Hong Kong are too low; there's limited room for Hong Kong lenders to cut the rates further,'' said Wong. ``It's likely we will leave our rates unchanged.''

The city's currency link to the dollar means Hong Kong must follow the Fed's moves even as inflation quickens. Consumer prices rose 4.2 percent in March from a year earlier, more than double last year's 2 percent average inflation rate. Eliminating the effect of a waiver on public housing rents, inflation accelerated to 5.3 percent.

Property Boom

Mortgage costs in Hong Kong have fallen below the rate of inflation this year, fueling a property boom in the city. Average prices for mass residential homes, defined as apartments smaller than 1,000 square feet, rose 15.6 percent in the first quarter from the end of 2007, according to Vigers International Property Consultant Ltd.

Rate cuts ``reinforce the conducive environment for investors to keep an eye out on the property market,'' said Kelvin Lau, an economist at Standard Chartered Plc in Hong Kong. ``Households would have less incentive to save and more to borrow.''

The Fed, while cutting its benchmark rate to 2 percent on April 30, signaled the most aggressive monetary easing in two decades may be coming to an end. Still, the U.S. central bank didn't rule out further reductions.

``We don't expect any further rate cuts'' among Hong Kong banks ``unless there's real aggressive cutting from the Fed,'' said Warren Blight, an analyst Fox-Pitt Kelton Asia Ltd.

HSBC plans to spend HK$300 million to upgrade outlets and add 10 branches in Hong Kong this year, creating an additional 160 service counters, said Louisa Cheang, head of personal financial services for Hong Kong. The bank plans to add 1,200 employees to support the expansion, she said.

To contact the reporters on this story: Theresa Tang in Hong Kong at ttang3@bloomberg.net; Bei Hu in Hong Kong at bhu5@bloomberg.net

Last Updated: May 1, 2008 23:38 EDT