All the data points to an improving S Korean economic environment

The Bank of Korea lifted its benchmark interest rate by a quarter of a percentage point to 3.5% from 3.25%.

Price growth in Asia's fourth-largest economy is stable, the bank said, but warned of pressure from oil costs.

Interest rates had been pushed to a record low as growth sputtered and consumers reined in spending.

Growing confidence

Economic growth is now expected at 4.6% in the second half of this year, up from 3% in the first six months and driven by an increase in consumer demand.

The government has helped to get people shopping again by implementing tax cuts, while unemployment levels have dropped giving sentiment a further fillip.

"The rate hike is as expected and reflects growing confidence over the economy following a recovery in domestic consumption," said Lee Sang-Jae of Hyundai Securities.

Market interest rates have risen mainly on expectations of economic recovery The Bank of Korea

"It is unlikely the central bank will continue to raise interest rates aggressively. Another rate hike is likely only in the first quarter of next year or so."

Inflation is expected to stay at close to 3% this year, however there is a threat that it may accelerate if crude oil costs stay high. South Korea has to import the majority of its energy requirements.

"There are latent inflationary pressures due to the persistently high oil prices," the bank said in a statement. "Market interest rates have risen mainly on expectations of economic recovery,"