The Bank of Korea raised its benchmark interest rate by 25 basis points to 2.75% on Thursday, marking the first increase in more than three years.
The decision ends a prolonged period of monetary accommodation as policymakers move to address mounting financial stability concerns.
The tightening comes as domestic credit conditions have tightened independently of policy rates.
South Korean banks increased the average interest rate on new household mortgage loans in May, reversing a downward trend that had persisted in previous months.
This divergence suggests that lenders are already pricing in higher risk premiums, even before the central bank acted.
Household borrowing accelerated sharply in June, with bank loans to individuals rising by 7.6 trillion won ($5.4 billion) from the previous month.