South Korea raises interest rate for first time in six years

[SEOUL] South Korea on Thursday raised its benchmark interest rate for the first time in more than six years, highlighting the country's robust economic recovery despite increasing threats from nuclear-armed Pyongyang.

The Bank of Korea increased the borrowing cost to 1.5 per cent, up from a record low of 1.25 per cent and ending 16 months of rate freezes since its last rate cut in June 2016.

It was the first time the country's central bank raised the rate since June 2011 and the first rate hike in Asia since 2014.

The hike comes despite mounting concerns over the growing nuclear threat posed by North Korea, which on Wednesday fired an intercontinental ballistic missile that Pyongyang said could strike anywhere on the US mainland.

Last month, the bank raised its growth forecast for this year to 3.0 per cent, saying it expects moderate recovery in exports and domestic consumption.

The International Monetary Fund also raised its prediction for South Korea's 2017 GDP growth to 3.2 per cent, citing "strong momentum".

"The country's strong growth outlook means further tightening is likely over the next year," said Krystal Tan, an economist at Capital Economics.

Ms Tan said a supportive fiscal policy, minimum wage hikes and a rebound in tourism from China will likely help hold up strong growth over the coming quarters.

Earlier this week, China reportedly resumed limited tour group travels to South Korea amid signs of warming ties between the two countries which were strained by Seoul's installation of a US missile defence system.

However, Ms Tan warned: "Aggressive tightening could cause problems for Korea's indebted households, who have debts equivalent to 90 per cent of GDP."

Park Chong Hoon, head of research at Standard Chartered Bank in Seoul, said he expected the Bank of Korea to hold off on any further rate hikes until the second half of 2018 "since the recovery in domestic demand looks insecure, and fast hikes could raise problems for indebted households".

"Whether the hike decision was unanimous will be of keen interest in the market," he told Bloomberg News.

AFP