June 15, 2017 12:26 pm JST

Hong Kong central bank raises base rate 25 basis points after Fed hike

HONG KONG (Reuters) -- The Hong Kong Monetary Authority (HKMA) raised the base rate charged through its overnight discount window by 25 basis points to 1.50 percent on Thursday, and the central bank chief said he expects banks in the city to gradually increase mortgage rates.

The move by Hong Kong's de facto central bank followed the Federal Reserve's decision to raise interest rates on Wednesday for the second time in three months, signaling its confidence in a growing U.S. economy and strengthening job market.

HKMA chief executive Norman Chan warned residents to tread cautiously in the property market, where prices have scaled record highs, as mortgage repayments were likely to increase.

"This time round, we may see a downward property cycle coinciding with an upward cycle of mortgage interest rate. We would like to remind everybody that they should remain vigilant and manage the risk prudently," Chan said.

"We expect that when the Hong Kong interest rate is tightening and rising, banks will gradually revise up their mortgage rates."

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

In May, Hong Kong imposed stricter restrictions on bank lending to developers, warning there was a need to review credit risks posed by property companies in one of the world's most expensive real estate markets.

Chan also said that if the interest rate differential widens further, there would be more arbitrage activities involving fund flows from the Hong Kong dollar to the U.S. dollar, which would lead to capital outflows.

The monetary authority sets its base rate through a formula that is 50 basis points above the prevailing 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).

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