larger-than-expected increase by the US Federal Reserve in short-term interest rates.

They are monitoring the consequences of a 3 of one percent increase in the federal funds rate, what banks charge each other on overnight balances held at the Fed.

The Fed's moves come amid concern over the hot pace of the US economic recovery in its third year. The action is designed to keep inflation under control in the burgeoning economy.

Executive vice president for banking at the Bank of N.T. Butterfield, Mr.

Colin Furr said, "Yes, we are looking at it very closely. We haven't decided to do anything either way. We are looking at the options and the effects of the 75-basis points change the other day by the Fed and the resultant market rate changes.'' The base rate in Bermuda was introduced in April at six percent, and was moved up in August to 6.5 percent.

The federal funds rate was raised from 4.75 percent to 5.5 percent. The discount rate, which the Fed charges banks on borrowings from its emergency discount window, will rise from four percent to 4.75 percent.

Ms Dominique Smith, general manager, corporate treasury at the Bermuda Commercial Bank said that her bank would be primarily affected through its mortgage subsidiary, Somers Mortgage & Finance, rather than through the bank itself.

"In my opinion, there is likely to be some impact as far as Bermuda dollar rates are concerned. That will be determined by liquidity needs etc., as far as where the rates are set and what the banks feel the impact will be on the Bermuda dollar liquidity and their lending policy in particular.

"Now that US dollar rates are going to be rising, Bermuda dollars rates will follow. Again, the determining factors will be Bermuda Dollar liquidity and the need for those funds.'' A spokesman for the Bank of Bermuda was unavailable for comment.

The federal funds rate increase is the sixth one this year, rising from three percent when the year began.

The rates were hiked by a quarter of one percent on February 4, March 22 and April 18. They then rose a half of a percentage point twice, on May 17 and again on August 16.

The discount rate was at 3.5 percent May 17, four percent on August 16 and 4.75 percent as of Tuesday.