The Hong Kong Monetary Authority raised its base interest rate charged via the overnight discount window by 25 basis points to 4.25 percent on Thursday, tracking a hike by the US Federal Reserve.
Hong Kong's monetary policy moves in lock-step with the United States as the city's currency is pegged to the US dollar in a tight range of 7.75 to 7.85 per dollar. It was the HKMA's first rate hike since July 2023.
Hong Kong's de-facto central bank said the Fed's decision to raise interest rates was in line with market expectations and reflected the committee's concerns about the outlook for inflation.
"The Hong Kong dollar and US dollar interest rate differential will widen, and carry trade activities may cause the Hong Kong dollar to ease toward the weak side of the band," HKMA chief executive Eddie Yue told reporters.
The Federal Reserve raised interest rates on Wednesday for the first time in three years, and flagged more hikes in the coming months.
US interest rate adjustments are subject to considerable uncertainty and may influence the interest rate environment in Hong Kong, and the public should carefully manage interest rate risks when making financial decisions, Yue added.
Hong Kong's monetary and financial markets have continued to operate in an orderly manner, and banks would take into consideration factors including funding supply and demand, the level of interest rates, and their own funding cost structures when making decisions on interest rates, the HKMA said.
Markets are now watching for adjustments by major Hong Kong banks, including HSBC and Standard Chartered, later on Thursday, particularly changes to their prime lending rates.
In Hong Kong, the prime rate serves as the pricing benchmark for mortgage loans, meaning banks can influence credit and borrowing demand through adjustments even when the base rate tightens.
Reuters and staff reporter
