Bank of Korea raises rates as markets see end of tightening

© Reuters. FILE PHOTO: A South Korea won note is seen in this illustration photo May 31, 2017. REUTERS/Thomas White/Illustration

By Choonsik Yoo and Jihoon Lee

SEOUL (Reuters) - South Korea's central bank raised its policy interest rate by 25 basis points on Friday, as expected, but suggested a possible downgrade of this year's economic growth projection and dropped a reference to the need for more rate hikes.

Those dovish comments came in a policy statement ahead of the governor's news conference. Economists in a Reuters poll had predicted Friday's rate increase would mark the end of a rate-hike cycle that the Bank of Korea's began in late 2021.

The Bank of Korea said its seven-member monetary policy board had decided to raise its policy interest rate to 3.50%, the highest since late 2008.

"Going forward, domestic economic growth is expected to weaken, affected by the global economic slowdown and the increase in interest rates, and GDP (gross domestic product) growth for this year will be below the November forecast of 1.7%," it said in the statement.

The three-year treasury bond futures had extended gains to 19 ticks by 0137 GMT from around flat levels. The won was 0.5% stronger against the dollar, slightly cutting gains from earlier levels.

The interest-rate rise matched a prediction by 36 out of 40 economists in a Reuters poll, in which the remaining four had expected the central bank to hold the rate steady at 3.25%.

Friday's decision marked the 10th rise since the current tightening cycle began in August 2021 and brought the total amount of increase to 300 basis points.

The decision follows Governor Rhee Chang-yong's remarks this month that the central bank's policy stance would continue to focus on stabilising prices. It would also pay attention to achieving a soft landing for the economy, he said.

Like its peers globally, the Bank of Korea is faced with growing pressure to adjust its policy stance as domestic consumer and corporate spending fades and global trade slows.

Rhee is due to hold a news conference at 0210 GMT to explain the policy decision.