South Korea turns into first main financial system to boost rates of interest throughout Covid

People walk down a commercial street in Seoul on February 24, 2021.

Ed Jones | AFP | Getty Images

The South Korean central bank hiked rates Thursday in a decision expected as financial risks worsen despite the threat from the virus.

The Bank of Korea raised its policy rate by 25 basis points to 0.75% for the first time in nearly three years, making it the first developed economy to raise rates during the pandemic era.

Bank of Korea Governor Lee Ju-yeol said the decision to raise rates was not unanimous and there was a dissenting board member calling for rates to stabilize. It was also shared among analysts polled by Reuters, with only 16 out of 30 anticipating Thursday’s rate hike.

One analyst, Alvin Tan, Head of Asia FX Strategy at RBC Capital Markets, called it a “reluctant rate hike” even though the market “fully anticipated a series of rate hikes.”

South Korea’s benchmark index Kospi fell 0.18% after the announcement. The Korean won weakened.

CNBC Pro’s Stock Picks and Investment Trends:

Most central banks around the world have cut interest rates to record lows to prop up their pandemic-hit economies. From the United States to Europe and Asia, governments around the world have put in place stimulus measures to help businesses.

“Granted, the virus remains a headwind for recovery,” Capital Economics said in a statement following the announcement.

South Korea has struggled with a high number of Covid cases in the past few weeks, with the 7-day moving average daily cases rising over 1,800 – compared to just over 400 in June, according to our World in Data.

Last week, the country extended its social distancing restrictions for another two weeks as Covid cases increased, according to Reuters.

“But the economy has become increasingly resilient to outbreaks, and rapid advances in vaccines should help the country move to lighter containment soon,” Capital Economics said.

The research firm pointed to financial risks putting the economy under pressure, such as soaring house prices, which rose 14.3% year over year in July. Household debt also shot up 10% year-on-year in the second quarter.

James Lee, chief economist for Japan and Korea at HSBC, said he wouldn’t rule out further tightening.

“Risks of financial stability – increasing household debt and real estate prices were not only an issue this year, not just last year, but at least in the last five years. Normalize the key interest rate”, he told the “Squawk Box Asia” on Thursday from CNBC.

The central bank will “keep the door open for further policy action,” he added. “But whether or not they can actually increase depends heavily on future growth prospects,” said Lee.