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INSTANT VIEW 5-Bank of Korea lifts policy rate for first time in 3 years

SEOUL, Aug 26 (Reuters) - The Bank of Korea raised its policy rate on Thursday for the first time in almost three years, as pressure from surging household debt made it the first major Asian central bank to hike interest rates in the pandemic era.

KEY POINTS * Full story * First rate hike since Nov 2018 * Sixteen of 30 analysts saw rate hike; 14 on hold - Reuters poll

MARKET REACTION

* Seoul stock market’s KOSPI falls sharply after the rate decision

* Won pares early gains after the release of the policy statement

COMMENTARY

ROB CARNELL, ECONOMIST, ING BANK, SINGAPORE

“I think the trading community were more on board with the hikes than the economists’ forecasts.

“I thought the Bank of Korea (BOK) would be on the brave side to go it alone and hike. A few days ago, we had yet more household debt numbers they’re continuing to rocket higher ... so I think they’ve wanted to address that for a while.

“The real question is do they squeeze another one in before the year-end? I think that would be the way I’m leaning now ... so long as COVID doesn’t start becoming problematic again.”

ALEX HOLMES, ASIA ECONOMIST, CAPITAL ECONOMICS

“There are good reasons to expect tightening to continue over the coming quarters. The virus remains a headwind to the recovery. But the economy has become resilient to outbreaks and rapid progress on vaccines should help the country move to more light-touch containment measures soon.

“The financial stability issues troubling the BoK continue to build. House prices rose by 14.3% y/y in July, the most since 2002. Recent data showed that household debt was up by 10.3% y/y in Q2, after posting its largest ever gain during April-June.

“With the policy rate still very low by past standards after the hike, the BoK will likely want to tighten further to clamp down on financial risks.”

WOEI CHEN HO, ECONOMIST, UOB, SINGAPORE

“I don’t think this 25-basis-point hike in the benchmark interest rate could have a significant impact on dampening property prices, but I think it’s somewhat of a signal to the market that they are quite concerned about household credit.

“There is a shortage of housing in South Korea, and interest rates are still very low even if you raised by (another) 75 basis points to bring it to pre-COVID levels, so I don’t think they can use just the interest rate as a tool to contain this.”

TEPPEI INO, SENIOR ANALYST, MUFG BANK, TOKYO

“Given the BOK has already indicated its intention to raise interest rates, it should be no surprise to markets. But some people including myself did not expect it to take an action just before Jackson Hole.

“The rate hike is notable in a sense that it is the first in Asia, apart from a move in smaller economies such as Sri Lanka. But on the other hand, it is questionable if other central banks will follow. Perhaps Taiwan’s economy is strong enough. But China appears to have an easy policy bias and Southeast Asian economies are, of course, nowhere near policy tightening.”

TRINH NGUYEN, ECONOMIST, NATIXIS, HONG KONG

“They are sending a message that debt is the bigger concern for them than the Delta impact on the economy, and I think that means that we can look at potentially another 25-basis-point hike. I think November is very likely.

“The message is quite positive. South Korea now has moved on from trying to recover and being in this emergency mode fighting the virus.

“It’s among the first in the world to start thinking about reining in the excess of the very strong medicine to fight the virus in 2020 ... they’re ahead of the game to start thinking about debt and I think that’s something the Fed will have to think about as well.

“I don’t think its going to be an aggressive rate hike cycle, it’s going to take it to 1% and then see how things go.”

MITUL KOTECHA, CHIEF EM ASIA AND EUROPE STRATEGIST, TD SECURITIES, SINGAPORE

“It was a very close call, and it appears the BOK has prioritized their concerns about rising household indebtedness over the rising COVID cases.

“The reaction (in the won) has been fairly muted, and the fact that the market was kind of split down the middle (on whether there would be a hike today) shows in the limited reaction.

“They will hike further. I don’t think there should be a major rush to be tightening, but it does open the door now for the next move potentially at the November meeting – at least one more by the year-end.

“Korea’s economic resilience will bear fruit, and now higher rates will bode well for the won. So we’re generally constructive on the won.”

Reporting by Tom Westbrook, Kevin Buckland and Joori Roh; Editing by Sherry Jacob-Phillips

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