The cost of overnight borrowing in Hong Kong could fall to about 3 percent by year-end, driven by expected interest-rate cuts by the Federal Reserve and weak loan demand, according to analysts.

DBS Bank forecasts the one-month Hong Kong Interbank Offered Rate to fall to about 2.5 percent, while Oversea-Chinese Banking Corp sees it near 3 percent. The rate saw its sharpest rise in nearly three decades in the September quarter amid stock inflows and a rush of initial public offerings, before easing to 3.5 percent as fund demand slowed after Super Typhoon Ragasa hit the city last week.

Hong Kong’s borrowing costs may drop further if the Fed cuts rates again this month, as the city’s currency peg to the dollar keeps local rates tied to US policy. Softer demand for dollars could also push Hong Kong’s currency past the strong end of its 7.75-7.85 per greenback trading band, prompting the city’s monetary authority to sell the local currency that would further boost liquidity.

“As the Fed proceeds with the policy rate cut, we expect the one-month and three-month HIBORs to trend gradually lower in the next few months and fall back to close to 3 percent levels by year-end,” said Cindy Keung, economist at OCBC in Hong Kong.

She expects a limited recovery in loan demand, which won’t be sufficient to drive the HIBOR substantially higher.

Lower funding costs would be welcomed by Hong Kong’s authorities. Bank loans as a proportion of deposits have risen since June but they still remain near the lowest level since 2009.

“Loan demand has improved lately but it’s still rather muted compared to historical levels,” said Carie Li, a global market strategist at DBS Bank in Hong Kong. There is room for the HIBOR to drop but the decline needs to be sustained for it to help boost the real economy, Li said.

Heavy inflows into shares and a banner year for equity fund-raising in the city — including deals from Zijin Gold International Co and Chery Automobile Co — also lifted short-term borrowing costs as investors sought local dollars to buy shares. First-time share sales in Hong Kong have raised more than $23 billion so far this year, on track for a four-year high, according to data compiled by Bloomberg.

Once the IPO effect wanes, it is possible for one- and three-month HIBORs to retrace lower to 2.5 percent by year-end, DBS’ Li said.