Seoul (AFP)

South Korea's central bank on Thursday announced an interest rate hike, becoming one of the first major world economic powers to increase borrowing costs since the start of the coronavirus pandemic.

Bank of Korea (BoK) raised key rate 25 basis points to 0.75% after policy meeting as country tries to curb growing household debt and a booming real estate market.

A few countries have started to raise interest rates, including Brazil, Russia, Chile and Mexico, and investors around the world are watching closely when the US Federal Reserve begins to cut its stimulus programs.

Twelfth largest economy on the planet, South Korea had maintained its rate at 0.5% since May 2020, its lowest ever.

This is the first rate hike since November 2018 and comes as financial authorities grapple with growing household debt and an overheating real estate market which analysts say could threaten the economic stability of the country. country.

South Korean household debt increased by 41.2 trillion won (30 billion euros) between April and June to reach a record high of 1.806 trillion won (1.312 billion euros), or nearly l equivalent of the country's GDP.

In Seoul's Myeongdong shopping district, August 26, 2021 Jung Yeon-je AFP

“Bank loans to households continued to rise rapidly as did the cost of housing across the country,” the BoK said in a statement.

The country has pursued a "healthy recovery", she added, asserting that "exports have retained their dynamism and that investments have remained important".

But analysts are cautious about the pace of the recovery and the consequences of the rate hike.

"Most developed countries have yet to raise their rates and I don't think South Korea's economic situation has improved," Joo Won, a researcher at the Hyundai Research Institute, told AFP.

"This increase seems to be aimed at calming the real estate market," said Joo, stressing that higher interest rates "will weigh on the vulnerable".

Lee Seung-euk, a researcher at the Korea Economic Research Institute, said the rise was "not good news" as the country faces a further rise in coronavirus cases.

"Social distancing rules could affect consumer behavior and slow down the recovery," he added.

The central bank kept its growth outlook at 4% for this year, but raised its inflation forecast from 1.8% to 2.1%, suggesting a possible tightening of its policy.

The rate hike comes as South Korea experiences the highest number of infections since the start of the pandemic, although low compared to the rest of the world, around 1,000 to 2,000 per day.

The country has long been praised as a model in the fight against the pandemic, with the population respecting social distancing measures but the vaccination campaign was slow to unfold due to supply shortages.

© 2021 AFP