Hong Kong raises base rate after Fed hike, Hong Kong dollar new 33-year low

The move came as the Hong Kong dollar fell to a fresh 33-year low, and looked set to test the low end of its trading band, which would prompt the de facto central bank to intervene.

The Fed raised interest rates by a quarter of a percentage point in its first hike this year and forecast at least two more hikes for 2018, signalling growing confidence that U.S. tax cuts and government spending will boost the economy and inflation, and lead to more aggressive future tightening.

Hong Kong tracks U.S. rate moves because its currency is pegged to the U.S. dollar.

The HKMA sets its base rate through a formula that is 50 bps above the prevailing U.S. Fed Funds Target or the average of the five-day moving averages of the overnight and one-month HIBORs (Hong Kong Inter-bank Offered Rate).

"The Hong Kong market has been experiencing a huge amount of liquidity. The monetary base of Hong Kong has risen to over HK$1.6 trillion and, as a result, the interbank interest rate had remained very low for a long time," Chan said.

"It would be a good thing for the HK dollar interest rate to normalise in line with the US interest rate."

In December, the HKMA raised the base rate by 25 bps to 1.75 percent and the central bank chief warned at the time that Hong Kong banks would gradually increase mortgage rates.

However, major banks such as HSBC and Standard Chartered later left the city's prime lending rate unchanged.

None of Hong Kong's top banks had announced changes to their lending rates by 0220 GMT on Thursday.

The Hong Kong dollar fell to 7.8469, inching closer to the lower end of the monetary authority's targeted trading band, as the interest rate gap between U.S. dollar rates and Hong Kong counterpart widened further.

"Following the US interest rate hike, I believe the Hong Kong dollar will soon touch its weakest level at 7.85. At that time, we will buy HK dollars and sell US dollars," Chan told reporters.

"HKMA will guarantee that the Hong Kong dollar will not weaken past 7.8500. This is the design and operation of the peg," Chan said.

"As the interest rate gap has widened between Hong Kong and the U.S., capital may flow out and that is something we don't need to worry about much."

The peg was put in place in 1983 and the current trading band was set in 2005. The system requires Hong Kong's interest rates to closely mirror those in the United States and for the HKMA to intervene to defend both ends of the band.

Most market participants do not see this bout of weakness as a threat or attack on the peg, unlike instances in the past.

Hong Kong's peg to the U.S. dollar has forced the former British colony to import ultra-loose monetary policy from the U.S. in recent years, with rock bottom interest rates in Hong Kong having fuelled soaring real estate prices.

Chan said mortgage rates in one of the world's most expensive property markets would have to rise in the longer term.

"Anticipation that HK interest rates will stay at a low level for a long time is an inappropriate anticipation. People have to better manage their risk in borrowing money," Chan said.

Home prices in the former British colony have surged for 15 straight months despite repeated cooling measures, further exacerbating public discontent towards housing affordability in the city of 7.4 million.

Analysts expect home prices, which surged 16.7 percent last year, to climb a further 5 to 20 percent in 2018.

Reining in a red-hot property market remains a top priority for the local government, but prices have been rising non-stop since 2016 despite eight rounds of mortgage tightening measures on top of tax and regulatory policies.

"Mortgage rates have been at a low level for a long time. As interest rates normalise, it will put pressure for a mortgage rate hike over the long term. It is a good trend for a healthy development of the Hong Kong property market," Chan added.