Strong Korea GDP Data Boost Chance Of Rate Hike Soon

South Korea's economy expanded at its fastest rate for more than a year in the second quarter, surpassing both market expectations and central bank estimates, the Bank of Korea said.

Economists said the strong data will keep the central bank on high alert for signs of excess liquidity and high inflation and increase the chances of another hike in interest rates sooner rather than later. The central bank's preliminary second-quarter report showed gross domestic product increased a seasonally-adjusted 1.7% versus the January-to-March quarter, above the market's forecast for a 1.3% increase and the central bank's previous forecast - unveiled earlier this month - for a 1.4% rise. In the first quarter, growth was up 0.9%. On the year, GDP grew 4.9, again outpacing economists' average estimate for a 4.5% increase, and the on-year growth rate of 4.0% posted in the first quarter. An official at the Bank of Korea's Economic Statistics Department said annualized growth was around 6.8%. The central bank attributed the strong second-quarter growth to robust exports and a solid recovery in domestic demand, particularly in capital investment and domestic consumption. Following the report, a senior central bank official said the economy will sustain its modest recovery going forward, but said growth in the third quarter likely won't be as strong as it was in the second quarter. "The (quarterly) growth won't be as high as the 1.7% growth (recorded in the second quarter)," said Lee Kwang-June, a director-general at the central bank's Economic Statistics Department. Korean financial markets hardly responded to the data with market watchers widely expecting strong growth numbers and already betting on an additional rate hike this year. "The market has already priced in the strong economy recovery of late," said Daewoo Securities' analyst Yoon Yeo-Sam. "Players will still trade cautiously until the next monetary policy meeting, where they will find clear answers about the additional BOK rate hike," he said.

Central Bank Expected To Retain Hawkish Bias

The central bank hiked its call-rate target to 4.75% from 4.50% earlier this month, the first increase since August 2006, taking the call rate to its highest level in six years. It will next review its monetary policy on 9 August. At 0256 GMT, the dollar was trading at KRW913.50, lower than Tuesday's close of KRW914.10. The benchmark five-year bond yield was down 2 basis points at 5.45%, unsettled by losses on the local stock market. Many economists and market observers expect the central bank to retain its hawkish bias throughout the rest of the year, forecasting the call rate target will be increased by 25 basis points sometime within the next three months. "Since the economy will continue to show a higher growth trend into the second half, the full-year (BOK official) target of 4.5% could be surpassed," said Park Jong-Youn, an analyst at Woori Investment & Securities. Park, who expects another monetary tightening in September or October, said: "The second quarter economic growth was a surprise, and it is likely to strengthen the excuse for a (further) monetary tightening." In the second quarter, exports rose a seasonally-adjusted 5.2% versus the previous three months, faster than the 2.7% quarterly rise in the first quarter. On year, exports were up 10.7%. Capital investment, meanwhile, rose 3.5% on the quarter, compared with a 4.4% on-quarter increase in the first quarter, the central bank said. The index gained 12.1% on the year, up from a 10.8% increase in the preceding quarter. However, the construction sector remained sluggish, falling 1.4% in the second quarter from a quarterly rise of 0.8% in January through March. On-year growth was also lower at 3.2%. Private consumption was up 0.8% on the quarter, slightly slower than the 1.5% on-quarter growth printed in the January-March period, but on the year, it gained 4.1%, the same rate as in the first quarter. The Bank of Korea will issue revised second-quarter GDP numbers in early September.