SEOUL: South Korea on Thursday lifted interest rates for the first time in more than six years, citing a strong economic recovery, and possibly leading the way for similar actions from other Asian central banks.
The hike comes on the back of a series of upbeat readings on Asia’s number four economy that have seen the Bank of Korea and International Monetary Fund lift their growth forecasts and despite an increasingly belligerent Pyongyang.
The BoK lifted borrowing costs to 1.5 percent, up 25 basis points and the first since June 2011, pointing to a “solid trend of domestic economic growth”, adding there have been moderate improvements in private consumption and strong growth in exports.
“Regarding further rate hikes, we will thoroughly monitor the basic flow of growth and inflation,” BOK Governor Lee Ju-Yeol told reporters.
Thursday’s announcement comes as central banks in Asia prepare for a run of increases by the Federal Reserve, which many fear could lead to a flood of cash leaving emerging economies as investors look for better and safer returns.
The US central bank, which has already lifted rates three times since December, is expected to press on with its tightening in 2018 as the world’s top economy improves and Donald Trump looks to push through inflationary tax cuts and spending measures.
Despite the hike the won was down one percent in Asian trade.
Last month, the bank raised its growth forecast for this year to three percent, saying it expects sound recovery led by exports to continue, while the IMF improved its outlook to 3.2 percent, citing “strong momentum”.
Krystal Tan, an economist at Capital Economics, said: “The country’s strong growth outlook means further tightening is likely over the next year.”
Tan added that 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.
China has reportedly resumed limited tour group visits to South Korea amid signs of warming ties between the two countries, which were strained earlier this year by Seoul’s installation of a US missile defence system.
However, Tan warned: “Aggressive tightening could cause problems for Korea’s indebted households, who have debts equivalent to 90 percent of GDP.”
And 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.”