South Korea’s central bank raised interest rates from a record low Thursday in its first increase since June 2011 in defiance of North Korean threats as Asia’s fourth-largest economy exceeds expectations on robust exports.
Convening one day after North Korea test-fired its most powerful missile yet, Bank of Korea’s seven policymakers decided to increase the key rate by a quarter of a percentage point to 1.50 percent at its November meeting.
Borrowing rates have steadily fallen during the past five years to a record low of 1.25 percent and stayed at that level since June 2016 to help South Korea’s fragile economic recovery.
Thursday’s decision was widely expected after third-quarter economic growth beat expectations. The South Korean won has gained against major currencies in the past month in anticipation of the rate hike, which will increase returns for investors.
South Korea’s economy is expected to post its fastest growth in three years in 2017, buoyed by surprisingly strong exports thanks to robust global demand for memory chips.
The central bank, which had revised its forecast on the South Korean economy in October, said the annual growth rate will slightly exceed that estimate. Private consumption and capital expenditure will continue to improve moderately while exports will stay strong thanks to the global economic recovery and a thaw in strained diplomatic ties with China, South Korea’s biggest trading partner, the bank said.
One area that the bank said was underperforming was employment. Slow growth in the service sector employment has hampered the improvement in the job market, it said.
Another concern was the high level of household debts that have increased as more households borrowed low-interest loans to buy houses. The bank said the growth level in household debts slowed since the government announced its plans to regulate the housing markets but the debt level still remained high.
The bank said the decision does not mean a sudden about-face in its monetary stance, adding that it would maintain its accommodative stance in the monetary policy while monitoring growth pace, inflation, central bank policies in major countries and geopolitical risks among others.