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

South Korea’s central bank raised interest rates on Thursday in a move that was expected as financial risks escalate 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 nearly three years, becoming the first developed economy to raise interest rates during the pandemic period.

Bank of Korea Governor Lee Ju-yeol said the decision to hike rates was not unanimous and a dissenting board member called for rates to remain stable. It was also divided among analysts polled by Reuters, with only 16 of 30 expecting a rate hike on Thursday.

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

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

Most central banks around the world have cut rates to record levels in an attempt to support their economies hit by the pandemic. From the United States to Europe and Asia, governments around the world have put in place stimulus measures to support businesses.

“Certainly, the virus remains an obstacle to the recovery,” Capital Economics said in a note after the announcement.

South Korea has been grappling with a high number of Covid cases in recent weeks, with a sliding 7-day daily average of over 1,800 – down from 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 resistant to epidemics and rapid progress on vaccines should help the country move to lighter containment measures soon,” Capital Economics said.

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

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

“Risks to financial stability – rising household debt, house prices, have been a problem not just this year, not just last year, but at least for the past five years. So when it gets the chance… the Bank of Korea will continue to normalize the key rate, ”he told CNBC’s“ Squawk Box Asia ”Thursday.

The central bank “will keep the door open to other policy measures,” he added. “But whether they can actually increase or not will depend heavily on growth prospects going forward,” Lee said.