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South Korea's Economy Grows 1.7% in Quarter, Tops Forecasts

South Korea's economy grew a faster-than-expected 1.7% in the second quarter from the previous quarter due to strong exports, data showed on Wednesday, reinforcing expectations for an interest rate increase soon.

The seasonally adjusted rise topped a median forecast in a Reuters poll for quarterly growth of 1.3%, and matched the pace seen in the fourth quarter of 2005. It also followed a 0.9% gain in the first quarter.

The central bank data bolstered the case for another increase this year in the overnight call rate target, now at 4.75%.

"There's room for further growth in consumer spending, and exports can continue their strength on demand from China," said Park Sang-hyun, chief economist at CJ Investment & Securities. "The data increases the likelihood for an additional rate hike. The Bank of Korea may raise rates again in September or October, after monitoring liquidity conditions for a while."

Asia's fourth-largest economy also grew 4.9% in the second quarter from a year earlier, the Bank of Korea estimated, compared with a median forecast for 4.5% annual growth. It follows an annual rise of 4.0% in the first quarter.

South Korea's economy has expanded for the 17th consecutive quarter, marking the longest period of successive quarterly growth since the third quarter of 1997.

Exports rose a seasonally adjusted 5.2% in the second quarter from the January-March period, the most since the second quarter of 2006, prompting companies to boost spending on production equipment by 3.5%, the estimates showed.

The data comes two weeks after the central bank raised interest rates by a quarter of a percentage point to a six-year high and for the first time in 11 months, in an effort to put the brakes on sizzling liquidity growth.

Analysts have already been expecting the Bank of Korea to lift borrowing costs at least once more this year, based on the central bank's optimism about the economy and its concerns about the fast money supply growth.

The central bank earlier this month upgraded its GDP growth forecast for 2007 to 4.5% from 4.4% previously, compared with a provisional 5.0% rise in all of 2006.

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