Hong Kong hikes borrowing costs after Fed move

Hong Kong followed the Federal Reserve and hiked interest rates on Thursday, putting an extra strain on the city's already troubled economy and almost certainly ramping up repayments for millions of homeowners.

In a widely expected move the Fed on Wednesday increased borrowing costs by 25 basis points -- only its second such move in a decade -- as the US economy increasingly shows improvement.

It also said it envisioned another three rises next year, up from previous assumptions for two, as it positions itself for a likely surge in inflation if US President-elect Donald Trump implements promised spending and tax-cutting measures.

The Hong Kong Monetary Authority, the city's de factor central bank, followed suit, raising its own rate to one percent from 0.75 percent, a move made to maintain its decades-old currency peg to the US dollar.

However, the move comes as the financial hub struggles with slowing growth in China's economy that has led to falling visitor numbers from the mainland, which has in turn hurt the crucial retail sector. Retail sales have tumbled for 20 successive months.

At the same time the property market, one of the most expensive on the planet, is already under pressure after the government unveiled fresh curbs, including last month's hike in stamp duty.

The Fed announcement hammered Hong Kong stocks, with property firms taking a hit. The Hang Seng Index was down almost two percent in early afternoon trade.

However, HKMA boss Norman Chan said the move would boost the local economy, pointing out that the city witnessed relatively high inflation and a rally in asset prices after the global financial crisis, when it had to follow Fed rate cuts despite faster growth.

"Hong Kong rates are low relative to inflation," he said. "When US rates normalise and Hong Kong rates rise, this is good for adjusting Hong Kong’s economic structure."

- Bloomberg News contributed to this story -