RPT-ECONOMIC SIGNALS-S.Korean rates seen up, won a concern

Wed Oct 13, 2010 7:31pm EDT

(Repeats at item first published on Tuesday ahead of monetary policy committee meeting) (For related story, double-click [ID:nTOE69100L])

By Yoo Choonsik

SEOUL Oct 12 (Reuters) - South Korea's central bank looks set to raise interest rates this week to curb inflation expectations with global currency tensions, but an uncertain global economy and the rising won may prompt it to pause afterwards.

A majority of economists surveyed by Reuters forecast that the Bank of Korea would raise its policy rate for the second time in four months on Thursday by 25 basis points to 2.5 percent, but would then pause.

Following are a set of financial graphics describing the economic factors feeding into the monetary policy debate.

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Graphics link.reuters.com/qef97p

For related story [ID:nTOE69100L]

For Reuters poll [ID:nTOE69900M]

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INFLATION, GDP, EMPLOYMENT HIGHER

Annual consumer inflation in September rose 1 percentage point to 3.6 percent, a 17-month high, from August. Most of the rise was accounted for by increases in the price of farm produce following bad weather, but domestic demand is picking up.

Employment growth is quickening and wage increases are running at around 6 percent, laying the ground for a rise in inflation expectations.

South Korea has been outpacing the average performance of the Organisation for Economic Co-operation and Development member economies for six successive quarters and is headed for its fastest yearly growth in eight years.

HOUSEHOLD CREDIT GROWING

South Korean policymakers are concerned that if current low interest rates are maintained for too long, it could encourage a risky increase in already high household debt.

Household credit has been expanding for 11 consecutive years, including through the global financial crisis. It kept rising for the first half of this year and looks certain to reach more than 70 percent of the country's annual gross domestic product.

Raising interest rates would show authorities are committed to containing credit growth, sources at the central bank and the government have said.

WON HEADING HIGHER

South Korean central bank officials have in the past played down any immediate impact domestic interest rate policy may have on the won's value.

But global tensions over a tide of capital flooding into emerging markets to seek higher yields than those available in the developed world is top of the international agenda.

So the central bank could be concerned a further tightening of policy could exacerbate the inflows of capital into its markets and thus push the won yet higher against the dollar.

Governments are striving to keep their currencies from appreciating too much as advanced economies maintain loose monetary policy, or are even moving to further ease policy to revive their recoveries.

The won has lagged behind its regional peers this year, but in September posted its fastest monthly gain in a year. It gained 5 percent in September and is close to reaching its highest level in two years. (Graphics by Catherine Trevethan; Editing by Neil Fullick)

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