Pedestrians cross the road in front of the Bank of Korea headquarters in central Seoul. Photo: AFP

South Korea’s central bank raised interest rates on Thursday, one of the first major economies to do so since borrowing costs were cut to record lows in the wake of the coronavirus pandemic.

The Bank of Korea raised its key rate by 25 basis points to 0.75% after a policy meeting as the country tries to rein in growing household debt and a frenzied housing market.

A few countries have begun to raise interest rates, among them Brazil, Russia, Chile and Mexico, and investors around the world are watching closely for when the US Federal Reserve will start to taper its huge stimulus programs.

South Korea, the world’s 12th-largest economy, had kept its key rate at a record low 0.5% since May 2020.

The move was the first rate rise since November 2018 and came as financial authorities grapple with surging household debt and an overheated housing market, which analysts warn could threaten economic stability.

South Korea’s household debt rose 41.2 trillion won (US$353 billion) during the April to June period to a record high 1,806 trillion won, roughly equivalent to the country’s GDP.

“Household loan growth has accelerated and housing prices have continued to increase rapidly in all parts of the country,” the BOK said in a statement.

The country has continued “sound recovery,” it added, saying “exports have sustained their buoyancy and facilities investment has shown a robust trend.”

The central bank maintained its growth outlook at 4% for this year, but raised its consumer inflation forecast to 2.1% from 1.8%, signalling a possible policy tightening.

The rate hike comes as South Korea sees its highest infection rates of the pandemic, albeit low by global standards, at about 1,000 to 2,000 a day.

The country had previously been held up as a model of how to combat the pandemic, with the public largely following social distancing and other rules, but it was slow to start its vaccine roll-out due to supply shortages.