HONG KONG, June 28 (Reuters) - Hong Kong private home prices retreated 0.7% in May from April, the first fall in four months, official data showed, as many home buyers stayed on the sidelines amid uncertainty over interest rate hikes and the economic outlook.

The drop in home prices last month in the financial hub, one of the most expensive markets in the world, followed a revised 0.4% rise in April, according to data released on Wednesday.

Market observers, including Bank of East Asia, have said they expect banks to raise their best lending rates again in July, following a 12.5 basis points hike in May, due to pressure on funding costs.

Hong Kong interbank rates rose further in June, with one-month Hibor, the benchmark used in pricing residential mortgage loans, surging to the highest level since October 2007.

Steep discounts offered by property developers on new launches also added pressure on prices, especially in the secondhand market.

Major developer Henderson Land this month offered the first batch of flats in a new development in Kai Tak, Kowloon, at prices about 15% lower than other new stock in the same area.

Transaction volume in June was expected to fall for a third month to a five-month low, realtor Centaline said. The spike in the beginning of 2023 was helped by the border reopening with mainland China and many new launches by property developers.

The industry has been urging the government to relax some property market curbs after housing prices dropped 15% last year.

Financial Secretary Paul Chan said on Sunday that Hong Kong planned to "fine-tune" the maximum size of mortgages available to some first-time home buyers because some residents wanted to upgrade homes after starting families, without giving further details. (Reporting by Clare Jim; Editing by Jamie Freed)