BOK raises key rate to 1.75%

BOK governor Lee Ju-yeol bangs gavel during the monetary policy board's meeting, Friday. Yonhap

South Korea's central bank on Friday raised the country's policy rate to a 3 1/2-year high of 1.75 percent.

As widely expected, the monetary policy board of the Bank of Korea (BOK) voted to raise the rate by a quarter percentage point for the first time since November last year.

The bank has constantly mentioned that it is the right time to address adverse effects caused by yearslong low borrowing costs.

The BOK has been under pressure to adjust the rate throughout the year to curb high-flying real estate prices and ballooning household debt.

South Korea's household credit, which surpassed 1,500 trillion won ($1.33 trillion) as of the end of September, has been on a record-breaking increase for nearly four years thanks to the government-led economy boosting measures and expansionary monetary policy.

Such eased borrowing cost and regulations have caused an excessive supply of liquidity in the market, inflating property prices.

The incumbent Moon Jae-in government, which took office in May last year, has been trying to cool down the overheated housing market and called the central bank on a higher interest rate.

BOK Gov. Lee Ju-yeol has continuously given hints at a rate increase in recent months, citing financial imbalance caused by a decade of low interest rates.

Moreover, the central bank has to take the widening rate difference between South Korea and the U.S. into account in the remaining months of 2018.

With Friday's increase, the Korea-U.S. rate gap reduced to 0.50 percent.

A widening rate spread could spark an outflow of foreign investment from South Korea, where foreigners hold more than 30 percent of all stocks in the market. (Yonhap)