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South Korea’s next rate move could be up not down

A woman uses a mobile phone in front of the Bank of Korea museum at the central bank's headquarters in Seoul.
SeongJoon Cho | Bloomberg | Getty Images
A woman uses a mobile phone in front of the Bank of Korea museum at the central bank's headquarters in Seoul.

If this week's stronger-than-expected economic growth data from South Korea is anything to go by, the next move in interest rates in Asia's fourth-biggest economy could be up instead of down.

Data released on Thursday showed South Korea's gross domestic product (GDP) rose 3.9 percent on-year in the first quarter of 2014. That was above market expectations for a 3.8 percent rise and a 3.7 percent increase in the final quarter of 2013.

Read MoreSouth Korean economy holds firm in first-quarter

"Stronger demand from developed markets offset weaker demand from China, keeping the Korean economy on track for a gradual export-led recovery," HSBC Economist Ronald Man said in a note.

"Pressure on the Bank of Korea to deliver an additional rate cut will likely dissipate, and we expect the next policy rate move by the central bank to be a 25 basis point hike from as soon as the third quarter of 2014," he added.

A tightening cycle in the Asia-Pacific is already under way, with New Zealand's central bank on Thursday hiking its key interest rate for a second straight month. New Zealand was the first major developed economy to start tightening monetary policy in the current economic cycle. Developing economies such as India have lifted rates in recent months to stem inflation.

Read MoreNew Zealand central bank hikes rates again

Outside the region, the U.S. Federal Reserve is unwinding its monetary stimulus as the economy gains strength in a move that is seen paving the way for higher interest rates, possibly next year.

Comments from new Bank of Korea governor Lee Ju-yeol also suggest a rate-hike could be on the way later this year. At his maiden news conference earlier this month, Lee said that should the economy keep improving, the central bank would be able to "discuss moving interest rates pre-emptively."

Economists said the GDP data from South Korea, an economy heavily dependent on exports, suggests the country has held up well in the face of a slowing Chinese economy. China is South Korea's main trading partner.

Read MoreKorean won undervalued by as much as 8% - IMF

"The GDP figures confirm that the economy remains well on track," analysts at Mizuho Corporate Bank said in a note. "In terms of policy, we expect the Bank of Korea to maintain a wait-and-see stance in the near term. Inflation is not a threat, so there may be no urgency for policy action."

The Bank of Korea's key rate is 2.5 percent and was left unchanged in April for an eleventh consecutive month.

HSBC's Man said there were two key downside risks for the South Korean economy: aggressive price competition in overseas markets from Japanese exporters and weak household demand resulting from rising rental costs.

Tim Condon, head of research at ING Financial Markets, said he would be watching upcoming data closely.

"The bottom line: The next couple of months are crucial to our forecast of another Bank of Korea policy interest rate cut," he wrote in a note.

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