week and has been advising its customers they can expect 1995 to bring lending rates to ten or 11 percent.

The move on the deposit side came just two days after the US Federal Reserve Board pushed interest rates higher for the seventh time in less than a year in an effort to cool a US economy that's already slowing down.

The bank's executive vice president, Mr. James Masters, said as Bermuda moves toward the deregulation of foreign exchange controls, the local bank rates will become more closely aligned with US dollar rates.

"We are telling our clients to prepare for higher lending rates,'' he said.

"Customers have to get their affairs in order and look at it in terms of another one or two percent higher rates than the current approximately nine percent. They have to consider what that means to their business and whether they need to come to talk to us and prepare for the higher local lending rates.

"It's an important point for all Bermuda residents, whether it's a company or an individual.

"There is now about a two percent difference between what you can get on deposit in Bermuda dollars and in US dollars. As we move toward a relaxation of exchange controls, depositors will make a choice. And when they can, they will opt for US dollar deposits.

"For us to be competitive, our deposit rates will have to go up. And that means that loan rates will also have to go up. If there is a message that we are trying to convey, that's the one that concerns us the most.'' The deposit rates on Friday were raised on average about a half percent to bring them in line with rates at the Bank of Butterfield.

Mr. Masters defended the banks from criticism they failed to improve depositors' yields until after the Fed raised interest rates some seven times.

Critics say the banks have benefited from the increased deposit rates they were able to obtain in US dollars without passing on any benefit to Bermuda depositors, until now.

He said while it was true that for some 15 percent of the deposits the banks had been able to increase their yield from overseas, they held off passing those benefits on in Bermuda because they would also have had to raise lending rates.

The new deposit rates as of last Friday include a passbook savings rate improving to 2.75 percent from 2.5 percent. A new statement savings product (without the benefit of a passbook) pays 3.75 percent.

Fixed deposit rates on demand (starting at $1,000) are rising to 3.75 percent from 3.25 percent. The rate for this product for one year rises to 5.25 percent from 4.75 percent.

Mr. Masters said changes in deposit and lending rates in Bermuda will be heavily influenced by what happens in the US.

But the banker conceded it was conceivable there could be further decisions locally this year in moving lending and/or deposit rates higher, in the absence of any further action by the Fed.