South Korea raises rates, the first major economy to do so during Covid

The South Korean central bank raised interest rates on Thursday in a decision that was expected as financial risks heat up despite the threat of the virus.

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

Bank of Korea Governor Lee Ju-yeol said the decision to raise rates was not unanimous and that there was a dissenting board member who called for rates to be maintained. It was also split among analysts polled by Reuters, with only 16 out of 30 expecting the rate to rise on Thursday.

One analyst, Alvin Tan, head of Asia FX strategy at RBC Capital Markets, described it as a “resentment rate hike”, although the market “fully expected a series of rate hikes”.

South Korea’s benchmark Kospi fell 0.18% after the announcement. The Korean victory strengthened slightly.

Most central banks worldwide have cut rates to minimums in an attempt to bolster their pandemic-affected economies. From the US to Europe and Asia, governments around the world have been implementing incentive measures to support businesses.

“It is true that the virus remains a wind against the recovery,” Capital Economics said in a note after the announcement.

South Korea has been facing a high number of Covid cases in recent weeks, with a daily average of 7 days exceeding 1,800 cases, compared to just over 400 in June, according to our World in Data .

Last week, the country extended the limits of social distancing for two more weeks as Covid cases increased, according to Reuters.

“But the economy has become increasingly resistant to outbreaks and rapid advances in vaccines should help the country move soon to more light-containing containment measures,” Capital Economics said.

The research firm noted the financial risks pressuring the economy, such as warming house prices, which rose 14.3% year-on-year in July. Household debt also rose, by 10% year-on-year in the second quarter.

James Lee, chief economist for Japan and Korea at HSBC, said he would not rule out hardening further.

“The risks of financial stability: rising household debt, house prices, have been a problem not only this year, not only last year, but at least for the past five years. Normalize the type of policy “he told CNBC’s” Squawk Box Asia “on Thursday.

The central bank “will keep the door open to new policy actions,” he added. “But whether they can really walk or not will depend largely on future growth prospects,” Lee said.