Hong Kong's Financial Secretary Paul Chan Mo-po holds a press conference at the Central Government Offices in Hong Kong, Feb 23, 2022. (PHOTO/HKSAR GOVERNMENT)

HONG KONG – Financial Secretary Paul Chan Mo-po on Thursday cautioned on external risks arising from the US Federal Reserve’s decision to raise its benchmark interest rate.

Chan said the Fed’s decision to raise the interest rate by 0.75 percent, the largest increase since 1994, could affect asset prices and lead to additional risks for emerging markets.

“For some of the emerging markets whose economic fundamentals are not as strong, they may be subject to additional risks and there would be increased volatility in the financial market,” Chan said.

“Given the rising interest rate, asset prices may be affected. So, for people who want to take out mortgage loans, who want to invest in different classes of assets, do pay attention,” he added.

Financial Secretary Paul Chan Mo-po said the substantial hike is in line with recent market expectations as the inflation rate in the US is at a 40-year high of 8.6 percent

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Chan said the substantial hike is in line with recent market expectations as the inflation rate in the US is at a 40-year high of 8.6 percent.

“This high inflation rate will be there for quite some time. So, the US will continue to increase its interest rate and also reduce the size of its balance sheet," Chan said. 

"So, the impact from a global standpoint would make the economic situation externally deteriorating, perhaps making it difficult, more difficult for us, in terms of our exports,” he added.

In Hong Kong, following the 75-basis point upward adjustment in the target range for the US federal funds rate, the Monetary Authority announced that the Base Rate was adjusted upward to 2 percent with immediate effect according to a pre-set formula.

Given the interest rate gap between the US and Hong Kong, there would be market activities to take advantage of the difference, but this should not be a cause of worry, Chan said.

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“As we have seen in the past two months, there has been capital flowing out from the Hong Kong market, but this does not require any worry, because under the Linked Exchange Rate System, this is a natural move and we have a very strong buffer," he said. "At the moment, we have over HK$280 billion ($35.67 billion) in our interbank balance.”