On Thursday the Hong Kong Monetary Authority (HKMA) increased its benchmark interest rate by 75 basis points (bps) to 4.25%, hours after the U.S. Federal Reserve did the same.

As a result, the HKMA cautioned households should prepare for a period of elevated commercial rates, Reuters reports.

This move led Hong Kong’s largest bank, HSBC to hike its main lending rate by 25 basis points to 5.375%, following the bank’s 12.5 basis point rise in September.

The increased commercial bank rates will “be a big blow to consumer and business spending and will strip optimism away,” according to Heron Lim, an economist at Moody’s Analytics. He added that prime rates in Hong Kong could hit 5.75% by December following the next Fed meeting, Bloomberg reports.

“The lack of consumer and business spending will impose a cap on Hong Kong’s recovery prospects for 2023 as consumers and businesses get used to a new normal,” he stated.

In addition, Hong Kong’s de facto central bank said the Hong Kong Dollar interbank rates will increase further should the U.S. continue to hike rates.

“The public should be prepared for the commercial interest rates to rise further, and carefully assess and manage the relevant risks when making property purchase, mortgage or other borrowing decisions,” said Eddie Yue, chief executive of HKMA.

According to Hong Kong's financial secretary Paul Chan, there is still a strong chance the Fed will keep hiking rates, which have impacted the city’s exports, along with a fall in external demand.

Yet he said there was no need to be too concerned about the effect on Hong Kong’s property and financial markets.

"The economic situation has been challenging but if we're able to put COVID-19 under control, if we're able to continue to have travellings between Hong Kong and the rest of the world, that would provide added impetus to our economic growth," Chan stated.