The composite interest rate, which reflects the average cost of funds of banks, increased from 3.1% at the end of April to 3.39% at the end of May, the Monetary Authority says. Click here for the trend of interest rates.

The rate hike followed a rise of 10 basis points in the composite interest rate in April.

The increase of 29 basis points in the composite interest rate in May reflected upward interest rate adjustments for customers' time deposits and short-term interbank funds, which were mainly due to the Initial Public Offering of Bank of China which tied up funds of $ 273 billion in the latter part of the month, causing a tightening of short-term interbank liquidity.

The subscription monies amounted to 12% of customer deposits with banks. 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.

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.