The Hong Kong Monetary Authority yesterday raised the base rate by 25 basis points to 1.5 percent, following the US Federal Reserve's interest rate hike.
Chief executive Norman Chan Tak- lam said the HKMA tends to follow the monetary policy set by the Fed since the Hong Kong dollar is pegged to the US greenback.
He also warned local residents to remain vigilant and manage risks prudently in the property market due to a possible "upward cycle of mortgage interest rates."
"The current property market cycle is different from the cycle in 1997," Chan said. "In 1997, the downturn in property market coincided with a downward cycle of interest rates, with mortgage interest rates falling from over 10 percent to 3 to 4 percent. This time round, a downward property market cycle may coincide with an upward cycle of mortgage interest rates."
HKMA rolled out new mortgage- tightening measures in late May. Chan said the measures weren't aiming at a specific stage of the property market, but to guarantee the stability of banks.
Chan expects banks to raise interest rates gradually due to an increase in capital outflows, even though there is still abundant liquidity in Hong Kong's banking system at present.
Capital outflows are expected due to increasing arbitrage activities, since the widened interest rate differentials between the Hong Kong dollar and US dollar. "We notice that the HK dollar exchange rate has recently eased to the level of around 7.80," Chan said.
The capital outflows may also prompt local banks to push up mortgage rates if liquidity tightened. But at present, major banks in the SAR have kept their prime rate unchanged.
Hongkong and Shanghai Banking Corp, Bank of China (Hong Kong), and Hang Seng Bank (0011) each maintained their prime rate at 5 percent per annum, while Standard Chartered Bank (Hong Kong) kept its annual prime rate at 5.25 percent.