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UPDATE 3-S.Korea c.bank switches tack to encourage growth

* C.bank policy report shifts emphasis toward lifting growth

* Sept CPI +2.0 pct y/y (+2.0 pct forecast, +1.2 pct in Aug

* Sept HSBC/Markit PMI at lowest since early 2009

* Case builds for Bank of Korea rate cut at Oct. 11 meeting

(Adds housing prices, new analyst's comment)

By Se Young Lee and Choonsik Yoo

SEOUL, Oct 2 (Reuters) - South Korea's central bank said on Tuesday it was now directing policy at lifting economic growth, as a survey showed the manufacturing sector shrank by the most in nearly four years, adding to the case for an interest rate cut next week.

The Bank of Korea's comment, contained in its compulsory policy report to parliament, marked a shift in emphasis toward encouraging growth, unlike the statement last month that had stressed achieving price stability as an objective.

"The Bank of Korea plans to manage monetary policy for economic growth to recover to the potential rate while ensuring inflation remains stable at the middle of the target range," it said in the report to parliament.

The HSBC/Markit survey showed the purchasing managers' index (PMI) of South Korea's export-reliant manufacturing sector fell to a seasonally adjusted 45.71 in September from 47.50 in August, touching its lowest since February 2009.

The HSBC/Markit survey marked the fourth consecutive month that the index was below the 50-level separating expansion from contraction in manufacturing activity, underscoring the extent of the current economic slump.

Although data released on Tuesday showed annual consumer price inflation rose to 2.0 percent in September from a 12-year low of 1.2 percent in August, the acceleration was largely due to a surge in food prices after heavy rainfall, and inflation was still running below the central bank's 3 percent target.

Economists said the latest data releases, along with figures out on Monday showing exports fell for a third consecutive month on an annual basis, reinforced the case for a rate cut most likely by 25 basis points.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Details of CPI, PMI data Graphics (Rates) (PMI) Recent stories on South Korean economy <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ BOK MONETARY MEETING OCT. 11

Market rates show investors expect the Bank of Korea to lower the policy rate again at its next meeting on Oct. 11, when it is also widely expected to downgrade its 2012 economic growth forecast for the third time this year.

"We expect the Bank of Korea to cut rates by 25 bp to support private consumption," said Ronald Man, economist at HSBC in Hong Kong.

"Given external demand remains weak, growth must be sustained from within," he said. "The chances of a 50 bp rate cut appears unlikely, as this may be considered too aggressive and can signal panic to the markets."

The Bank of Korea has said changes in its policy would be made in a baby-step manner.

In July, the bank trimmed its policy rate by 25 basis points to 3.0 percent in a surprise move, and has since kept it unchanged, in anticipation that stimulus measures in Korea and other major economies.

Indicators have increasingly shown that since the July policy meeting, Asia's fourth-largest economy has lost momentum more rapidly than expected as global demand slumped in the shadow of Europe's protracted debt crisis.

South Korea's quarterly economic growth dipped to a seasonally adjusted 0.3 percent in the April-June period from 0.9 percent in the first quarter, and growth in the third quarter is seen to mark a similar pace to the second quarter.

The country's top mortgage lender also released data on Tuesday highlighting depressed consumer sentiment, with housing prices falling for a third consecutive month in September to mark the worst sequence since early 2009.

The market reaction was muted with the latest data matching

expectations and many investors were still following the Chuseok thanksgiving holidays that officially ended on Monday.

(Additional reporting by Christine Kim; Editing by Eric Meijer/Simon Cameron-Moore)

((choonsik.yoo@thomsonreuters.com)(+822 3704 5580)(Reuters Messaging: choonsik.yoo.thomsonreuters.com@reuters.net))

Keywords: KOREA ECONOMY/INFLATION

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