Hong Kong raised its interest rates by a quarter point to 1 percent on Thursday, with immediate effect according to a preset formula, for the first time in a year, following the 25-basis point upward shift of US federal funds rate last night.

Norman Chan Tak-Lam, chief executive of the Hong Kong Monetary Authority, said the increase of US interest rates earlier is within expectation and a gradual path of interest rate hike in the next three years is expected, adding that Hong Kong interest rate will over time track US dollar interest rate movements.

Chan elaborated that the pace of US monetary policy normalization remains uncertain due to the tightening labor market, rising energy and commodity prices, and the fiscal policy of the incoming US administration. The three factors may have a significant impact on inflation and inflation expectation going forward.

While the pace of US monetary policy normalization is set to have some impacts on capital flows, exchange rates and asset prices in the global market, according to Chan. He warned the public to stay vigilant and prepare for the market volatility and risk that may arise from the normalization of US and Hong Kong interest rates later on.

Chan also mentioned that the rising trend in Hong Kong dollar interbank interest rates is likely to be gradual, depending on the scale of outflows from the Hong Kong dollar, international developments and other related factors.

According to the HKMA, under the Linked Exchange Rate System, Hong Kong has experienced a strong capital inflow since 2008, amounting to over $130 billion, and the Monetary Base has expanded substantially to HK$1.6 trillion ($206 billion), which has provided the banking sector in Hong Kong with ample liquidity and drove interbank interest rates to very low levels.

Most of the institutions surveyed by China Daily expected the United States to raise interest rates once this week and there will be two to three further rates hikes by the end of next year.

Hang Seng Index dropped 397.22 or 1.77 percent to close at 22,059.40 on Thursday and Hang Seng China Enterprises Index decreased 64.4 or 1.75 percent to 3,621.92.