Seoul  - South Korea's central bank raised its key interest rate Thursday to the highest level in seven and a half years in a bid to tame spiraling inflation.

The monetary policy committee decided to raise the base rate by 25 basis points from 5 per cent to 5.25 per cent, the Bank of Korea said.

It was the highest since early February 2001 and the first time the bank increased its interest rate since August 2007.

"The committee judges that this action should contribute to containing inflation expectations which have gathered strength influenced by the recent sharp rise in headline inflation," the bank said.

Unlike core inflation, headline inflation takes into account all types of inflation in an economy.

Consumer prices rose 5.9 per cent year-on-year in July, the fastest growth pace in 10 years.

The central bank expects full-year inflation of 4.8 per cent.

"Although the economy is slowing amid sluggish consumer and corporate spending, I do not think a rate hike of 0.25 percentage point would severely hurt economic growth," central bank governor Lee Seong Tae told reporters.

"A high degree of uncertainty still surrounds future economic developments, largely due to the increased volatility of international oil prices, international financial market unrest and the US economic slowdown," the bank said.

South Korea's economy grew 0.8 per cent from the first quarter to the second quarter as robust exports made up for a drop in consumer spending, the central bank reported in July. (dpa)