* HKMA expects HK dollar to weaken if rate differential widens
* Expects banks to raise mortgage rate as liquidity tightens
* HSBC, StanChart leave interest rates unchanged in Hong Kong (Add banks’ move, stock market reaction)
HONG KONG, June 15 (Reuters) - The Hong Kong Monetary Authority (HKMA) on Thursday raised the base rate charged through its overnight discount window by 25 basis points to 1.50 percent, and the central bank chief said he expected the city’s banks to gradually increase mortgage rates.
The move by Hong Kong’s de facto central bank followed the Federal Reserve’s decision to raise interest rates on Wednesday for the second time in three months, signaling confidence in a growing U.S. economy and a strengthening job market.
However, HSBC and Standard Chartered later said they would leave the city’s best lending rate unchanged.
HKMA chief executive Norman Chan warned residents to tread cautiously in the property market, where prices have scaled record highs, as mortgage repayments were likely to increase.
“This time round, we may see a downward property cycle coinciding with an upward cycle of mortgage interest rate. We would like to remind everybody that they should remain vigilant and manage the risk prudently,” Chan said.
“We expect that when the Hong Kong interest rate is tightening and rising, banks will gradually revise up their mortgage rates.”
Hong Kong tracks U.S. rate moves as its currency is pegged to the U.S. dollar.
Last month, Hong Kong imposed tougher curbs on bank lending to developers, warning of a need to review credit risks posed by property companies in one of the world’s most expensive real estate markets.
Chan also said if the interest rate differential widened further, there would be more arbitrage activities involving fund flows from the Hong Kong dollar to the U.S. dollar, which would spur capital outflows.
The Hong Kong dollar had weakened to 7.8009 against the U.S. dollar on Wednesday ahead of the Federal Reserve’s decision, the second time it broke through the 7.8 level since February 2016, on concern over capital outflow on a widening interest spread.
The Hong Kong dollar was at 7.8002 on Thursday afternoon.
The monetary authority sets its base rate through a formula that is 50 basis points above the prevailing Fed funds target or the average of the five-day moving averages of the overnight and one-month HIBORs (Hong Kong Inter-bank Offered Rate).
Hong Kong stocks fell 1.2 percent on Thursday with the property sub-index sliding 1.2 percent to its lowest close in two weeks. Shares of New World Development slid 2.3 percent and Sun Hung Kai Properties fell 1.7 percent. (Reporting by Donny Kwok and James Pomfret; Editing by Jacqueline Wong and Clarence Fernandez)