The Bank of Korea raised interest rates on Thursday, becoming the first major Asian economy to start withdrawing from record lows in borrowing costs as financial risks pose a threat to the economy.

The central bank of Korea decided to raise the seven-day repo rate to 0.75 per cent, a result expected by nine of the 20 analysts surveyed by the media, while the rest expect the bank to keep interest rates at 0.5 per cent. The Bank of Korea will release its latest economic outlook soon.

The move shows that the focus of South Korea's monetary policy has shifted from supporting the economy to curbing debt-fuelled asset bubbles that risk spiralling out of control. How the Bank of Korea's tightening action will affect its economy and markets will be closely watched by other central banks, which are looking for ways to exit stimulus measures during the epidemic.

"the Bank of Korea's concern about financial imbalances may exceed that of novel coronavirus, a Delta variant, about downside risks to economic growth," Citigroup Inc economists Kim Jin-wook and Yoon Jeeho said before the policy decision was released. A second rate hike is likely in November as the latest epidemic fades, vaccination rates rise and house prices continue to rise, they wrote.