The Hong Kong Monetary Authority increased the base rate by 25 basis points to 2.00%, after a similar move by the U.S. Federal Reserve on March 21.
Hong Kong's currency, which is pegged to the U.S. dollar between HK$7.75 and HK$7.85, dropped to its lowest level in 35 years, the South China Morning Post said. The local currency traded at HK$7.8457 per U.S. dollar on March 21.
"The Hong Kong dollar is now on the edge of the weak end of the peg," said Hong Kong Monetary Authority Chief Executive Norman Chan Tak-lam. "Once the threshold is touched, HKMA will defend the peg by buying the Hong Kong dollar and selling the U.S. dollar." Chan said that such a move would shrink liquidity in the local banking system and force banks to raise their lending rates.
The rate hike will also put upward pressure on mortgage payments linked to the Hong Kong Interbank Offered Rates, or HIBOR. One-month HIBOR increased to 0.81% while the three-month HIBOR climbed to 1.11%.