The Bank of Korea(BOK) raised the benchmark interest rate by a quarter of a percentage point to one-point-five percent on Thursday.
The hike brought an end to the record low interest rate that had continued for 17 months.
Despite tensions created by North Korea's missile launch a day earlier, the move was widely expected as BOK Governor Lee Ju-yeol had given prior notice for a need to adjust the monetary policy.
He first hinted at a rate hike five months ago and effects of the move have already been reflected in the market.
The rate rise marks the first hike in over six years.
The central bank last raised the rate from three to three-point-25 percent in June 2011. It has since continuously lowered the key rate.
The rate hike comes amid the strong belief that the economy is showing clear signs of a recovery.
In the third quarter, the nation’s gross domestic product grew 1.4 percent and export growth has been strong since October. The International Monetary Fund also raised its 2017 growth outlook for South Korea to three-point-two percent, and expects three percent growth for next year.
Consumer sentiment, which had suffered blows due to North Korea-related risks and the conflict with China over the deployment of the THAAD antimissile system, also improved significantly, posting a record high last month for the first time in nearly seven years.
The last-minute development of North Korea's missile launch on Wednesday did not affect the expected rate hike.
Meanwhile, South Korea's household debt has topped 14-hundred trillion won, an apparent side effect from long years of low interest rates.
Another U.S. rate hike expected next month also had an effect on the rate decision.
If the BOK froze its rate and the U.S. goes on to raise its rate next month, funds will naturally trickle into the U.S. from Korea.
The rate hike will inevitably burden households, smaller firms and small-scale businesspeople.
Higher interest on loans is believed to raise households' interest burden by more than 2.3 trillion won. Small businesses and vendors are to set to suffer a triple blow of a minimum wage hike, stiffer loan regulations and now an increased interest burden.
Despite the negative effects, the rate hike implies the need for it had outweighed such risks.
Market observers believe the central bank will mark up the key rate one or two more times next year depending on economic conditions, trends in the real estate market and household debt, as well as the frequency of rate hikes in the U.S.