"As the interest rates in the United States keep going down many of our banks will need to follow that, so that raises the issue of inflation and that is something that we are quite concerned about," Tsang told a news conference during a two-day visit to European Union President Slovenia.
He said he expected annual inflation in Hong Kong to reach 4 to 5 percent, up from 2 percent last year, but added inflation was more likely to skirt the top of the forecast range.
"At this time, the economic situation does not look very clear so I am keeping my (inflation) forecast at about 4 to 5 percent but the risk is on the higher side," Tsang said.
He said a possible recession in the United States would slow down economic growth in Hong Kong, which would in turn lower inflation, driven mainly by the growth of global food and oil prices.
But Tsang said Hong Kong's economy was still strong, growing 7.1 percent in the first quarter, which was well above expectations and raised "new concerns in terms of inflation".
"Inflation indeed is a problem that we see will be continuing for some time even though the food prices seem to be stabilising but they will remain at a fairly high level so that is something that we will need to get used to in the coming year or two," said Tsang.
In April, Hong Kong's year-on-year inflation rose to 5.4 percent from 1.3 percent a year ago.
For the full year, Hong Kong expects growth of about 4 to 5 percent, down from 6.4 percent in 2007, mainly on account of the expected slow down in the United States which is Hong Kong's biggest export market after mainland China.
