The Bank of Korea on Thursday sharply raised its expectations for economic growth and inflation and said it would pay more attention to growing financial imbalances.

The central bank of Korea said the economy could grow by 4 per cent this year, up from a previous forecast of 3 per cent, and inflation would reach 1.8 per cent, closer to the target. The central bank of Korea kept the seven-day repo rate at a record low of 0.5%, in line with expectations.

Exports and investment have driven South Korea's economic expansion this year, boosting confidence and prompting analysts to make a series of adjustments to the outlook. The upbeat forecast from the Bank of Korea prompted investors to readjust their expectations of when the bank might start raising interest rates.

The economic recovery has strengthened and consumption is gradually coming out of the doldrums, supported by trade, the Bank of Korea said in a statement after the decision. The Bank of Korea reiterated its commitment to keep policy loose, but said it would pay more attention to growing financial imbalances, including rising household debt.