Bank of Korea (BOK) Governor Rhee Chang-yong and other monetary policymakers unanimously decided to lift the benchmark seven-day repurchase rate by 25 basis points to 3.25 percent, which marked the sixth straight rate hike for the first time.
The BOK set off its tightening monetary policy in August last year, raising the benchmark rate by 25 basis points in April, May and August and by 50 basis points in July and October, respectively.
The Thursday hike was in line with market expectations. According to a Korea Financial Investment Association poll of 100 fixed-income experts, 70 percent predicted the 25-basis-point rate increase this month.
The survey showed that 29 percent of respondents expected a 50-basis-point rate hike.
The BOK has been under pressure to counter the still high inflation, which stayed at a level nearly tripling the bank's mid-term inflation target of 2 percent.
The country's consumer price inflation gained speed this year from 3.6 percent in January, 4.1 percent in March, 5.4 percent in May and 6.3 percent in July each, before slowing to 5.7 percent in August and 5.7 percent in October.
Inflation expectations, which measure the outlook among consumers over headline inflation for the next 12 months, stood at 4.2 percent in November after hitting a record high of 4.7 percent in July.
The BOK said in a statement after the rate-setting meeting that the policy for ensuring price stability should be continued as inflation still remains high.
The central bank noted that the size of the rate hike was appropriate at 25 basis points in overall consideration of the easing of risks in the foreign exchange sector and the contraction of short-term financial markets while an economic slowdown was expected to be greater than previously forecast.
The U.S. Federal Reserve's swift rate hikes put the BOK on alert as the belated response may force foreign funds out of the South Korean financial market and lower the value of the South Korean currency versus the U.S. dollar.
The depreciation of the local currency would increase energy import costs, putting additional inflationary pressures on the country's economy.
The Fed took a giant step for the fourth consecutive time earlier this month to hike its policy rate by 0.75 percentage points to a range of 3.75-4.00 percent, lifting its benchmark rate above the South Korean policy rate.
Expectations ran high for the Fed to tighten its monetary policy stance further later this year to rein in inflation.
Market watchers forecast that the BOK would raise rates further next year, setting their target interest rate at between 3.50 percent and 3.75 percent in the first half.
The BOK said it saw the continued rate hikes as warranted for some time as inflation was expected to remain high, substantially above the target level, although the domestic economic growth rate has slowed.
Concerns also mounted over an economic downturn as higher borrowing costs would expand the debt-servicing burden for households, which have suffered from record-high debts.
Household credit, which includes debt owed by households to banks and other lenders in addition to purchase on credit, hit a record high of 1,870.6 trillion won (1.38 trillion U.S. dollars) at the end of September, up 2.2 trillion won (1.6 billion dollars) from three months earlier.
The increased debt-servicing burden was expected to weigh down on private consumption, while high inflation may reduce real income for households.
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