South Korea in surprise rate rise to fight inflation

Watch: Lucy Williamson explains the central bank's decision to raise rates.

The Bank of Korea has raised the cost of borrowing in a surprise move, as fighting rising consumer prices emerged as the central bank's top priority.

The bank upped its main interest rate on Friday from 3% to 3.25%.

Many analysts had expected rates to stay on hold again, but the bank has seemingly become uncomfortable with persistently above-target inflation.

Inflation actually fell to 4.1% in May, after peaking at 4.7% in March. The bank targets a range of 2-4%.

Sacrificing growth?

Despite inflation hovering above the target range, analysts had been divided as to whether the central bank would raise rates.

"We are surprised by the hike because we thought the Bank of Korea would freeze the interest rate until July or August," said Jeong Yong-Taek, from KTB Securities.

The Korean economy has been showing signs of slowing down and markets were expecting the central bank to prioritise growth over tackling price rises.

"The move comes despite two consecutive declines in the domestic economy... suggesting that the central bank is indeed putting the fight against accelerating inflation ahead of supporting growth," said George Worthington, Chief Economist for Asia Pacific at IFR Markets.

The central bank previously raised rates by a quarter of a percentage point in January and again in March.

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