The composite interest rate, which reflects the average cost of bank funds, fell to 3.16% at the end of June from 3.39% at the end of May.

The 23 basis points decline reflected the fall in customers' time deposits and short-term interbank rates during the month, after the completion of the Initial Public Offering of the Bank of China.

It had caused a temporary tightening in short-term interbank liquidity in the latter part of May. The overnight interbank rate dropped to 3.99% at the end of June after raising to 4.77% at the end of May.

Monetary Authority Deputy Chief Executive Peter Pang said the fall in the average cost of funds reflected largely the easing back to their pre-IPO levels of interest rates for customers' time deposits and short-term interbank funds.

Since the launch of the current up-cycle of US interest rates from the middle of 2004, the composite interest rate has increased by 292 basis points, compared with the upward adjustments of between 300 basis points and 325 basis points of the best lending rates of banks.