The Hong Kong Monetary Authority followed the US Federal Reserve in raising interest rates, as widely expected, for the first time in more than three years to tackle persisting inflation amid conflict in the Middle East.

The HKMA raised its base rate – the interest rate forming the foundation upon which the Discount Rates for repurchase transactions through the Discount Window are computed – charged via the overnight ⁠discount window by 25 basis points to 4.25 percent, according to a statement issued on Thursday morning.

The move came hours after the Federal Open Market Committee of the Fed voted unanimously to increase the benchmark federal funds rate to a range of 3.75 percent to 4 percent.

The Fed also flagged more hikes in the coming months, with new US central bank chief Kevin Warsh joining a unanimous decision that effectively acknowledges the Trump administration's inability so far to control inflation that policymakers worry could worsen.

Hong Kong's monetary policy ⁠moves in lockstep with the United States as the city's ⁠currency is pegged to the greenback in ⁠a tight range of ⁠7.75-7.85 per dollar.

“Following the 25-basis point upward adjustment in the target range for the US federal funds rate on 16 September (US time), 50 basis points above the lower end of the prevailing target range for the US federal funds rate is 4.25 percent, while the average of the five-day moving averages of the overnight and one-month HIBORs is 2.50 percent,” reads the HKMA statement.

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In Hong Kong, the best lending rates are used as a base for banks to quote rates on mortgage loans, so they have an ability to encourage more credit and borrowing even as the benchmark tightens. The one-month HIBOR (Hong Kong Interbank Offered Rate), a key mortgage reference rate, has climbed to 2.95 percent — the highest in almost three months — while staying far below its US equivalent.

The Hong Kong dollar has been trading near the weakest level permitted under the city’s linked exchange rate system, which it last touched just over a year ago.

In 2025, the HKMA, following the Fed, reduced key policy rates by three quarters of a percentage point, with the latest on Dec 11. Though analysts forecasted two to three more rate cuts for this year, the situation changed since the launch of the US-Israel attack on Iran on Feb 28.

While President Donald Trump had promised to lower prices on his watch, the combined impact of his global import tariffs, an energy shock following the start of the US-Israeli war with Iran, and capital spending from the artificial intelligence boom has kept price pressures intense.

The rate increase was the first such move in three years and the first policy shift under the new Fed chief who took office in late May after being selected by Trump with an expectation that he would cut rates.

"Inflation remains elevated. Today's policy action will support a timelier return to the committee's 2 percent goal," the central bank's Federal Open Market Committee said in its policy statement after the end of a two-day meeting.

Speaking in his post-meeting press conference, Warsh called the rate hike the "right decision."

"I would be hard-pressed to describe broad financial conditions as restrictive," he said. "This view was widely shared by the committee, so we removed a dose of accommodation."

With inputs from agencies