SEOUL -- The Bank of Korea raised its benchmark interest rate 25 basis points to 0.75% on Thursday, making it the first major central bank in Asia to hike rates since the onset of the pandemic.
The BOK's decision to lift the rate from a record low level was its first tightening of policy since November 2018. The move, aimed at cooling the property market as household debt surges, was forecast by 16 of 30 analysts surveyed by Reuters.
"The economy is likely to continue its recovery as private consumption is forecast to improve gradually, affected by the expansion of vaccinations and the execution of a supplementary budget, while exports and investment are expected to sustain their buoyancy," the BOK said in a statement.
The BOK added that gross domestic product growth this year is projected to be around 4%, consistent with the forecast its May.
House prices are soaring on the back of abundant liquidity in the market, and homebuyers have appeared to have ignored advice from the government and the BOK that they could lose money if the bubbles bursts. The apartment transaction price index jumped to 114.1 in June, up from 101.5 a year ago, according to Korea Real Estate Board.
The BOK touched on this in its statement, saying: "Household loan growth has accelerated and housing prices have continued to increase rapidly in all parts of the country."
The cheap money has also created a boom in the country's initial public offerings as investors bet on newly listed companies on Seoul's stock market. Krafton, a leading video game company, raised 4.3 trillion won ($ 3.7 billion) in its IPO earlier this month, marking the biggest deal in 11 years.
The central bank also hinted at more rate hikes over the medium term, and forecast that consumer price inflation will increase to the lower 2% level this year.
"The Board will gradually adjust the degree of monetary policy accommodation as the Korean economy is expected to continue its sound growth and inflation to run above 2% for some time, despite ongoing uncertainties over the virus," the BOK said. "In this process the Board will judge when to further adjust the degree of accommodation while thoroughly assessing developments related to COVID-19, changes in the pace of growth and inflation, the risk of a buildup of financial imbalances, and monetary policy changes in major countries."
Analysts say that the central bank may raise the key rate again later this year or early next year as the central bank's concerns of financial imbalance outweigh the fourth coronavirus wave risks to the economic growth.
"Financial imbalance risks continue to deteriorate in July and August, as the fourth COVID wave has not moderated the housing market rally," Kim Jin-wook, an economist at Citigroup, wrote in a note earlier this month.
"The timing of our second hike call in January 2022 could be brought forward to November 2021 if the policy guidance from the August-to-October Monetary Policy Board meeting is more hawkish with a gradual stabilization of the COVID wave."
The BOK's move comes a day before a key speech by Federal Reserve Chair Jerome Powell on Friday at Jackson Hole, Wyoming. Investors are looking to see if Powell indicates a timeline for tapering the Fed's bond-buying programme.
