The US Federal Reserve raised interest rates last week for the first time since 2018 and promised more to come. And yet, the Hang Seng Index jumped more than 1,400 points. This followed the biggest one-day gain since October 2008 the day before. The move, well-advertised in the United States for over a year, had been digested by the market, which instead responded to Vice-Premier Liu He’s well-received promise of a slew of supportive measures after the recent stock rout. The rise of a quarter-percentage point alone may not have too much impact on people in Hong Kong. But with the Fed forecast to prompt at least six more increases this year, followed by four in 2023, of 25 basis points each, the cumulative effect will be substantial and keenly felt by borrowers in the city. The Hong Kong Monetary Authority (HKMA) has always followed the Fed in lockstep under the dollar peg. Local commercial lenders may have some leeway to hold off raising their best lending rate, but it’s only a matter of when, not if, for them to follow suit. In the last rising cycle from 2015 to 2018, the banks waited for several increases by the US Fed/HKMA before raising their own rates. But with possibly 10 increases in store for the Fed, the most hawkish scenario will see a total rise of 250 basis points or 2.5 percentage points by the end of next year. The potential rise of a base lending rate to 3.25 per cent by the end of 2023 may prove challenging for the local economy and businesses because the city is still reeling from the Omicron outbreak. Since inflation is at its highest in four decades in the US, there are few reasons to expect the Fed to relent in its campaign to raise rates. Meanwhile, Hong Kong’s growth for the rest of the year will very much depend on how fast we can recover from the pandemic’s fifth wave, which has ravaged the local population and economy. For mortgage holders, increases in repayments are likely to be substantial. Why Fed’s hard pivot on inflation has stock markets spooked At the moment, the Hong Kong interbank offered rate (Hibor) on which most new mortgage loans are based is stable, as there is ample liquidity within the local financial system. But a higher base rate by the HKMA will push up Hibor, which recently hit a 15-month high. As Hibor goes up, so will mortgage rates tied to it. Those who hold mortgages on the prime rate may have to pay even more. Financial Secretary Paul Chan Mo-po has spent the past year urging people to prepare for higher borrowing costs. Fed chairman Jay Powell says he is prepared to act even more aggressively to tackle excessive inflation. Local banks are likely to moderate the pace of rate increases, but borrowers better pay attention and be prepared for a tougher financial time to come.