UPDATE 1-S.Korea Oct consumer sentiment hits 1-1/2 yr high as economy grows
* Consumer spending props Q3 growth as rates, inflation remains low
* Household debt, property market pressures households (Adds detail, comment, context)
By Christine Kim
SEOUL, Oct 28 (Reuters) - South Korea's consumer confidence leapt in October to its highest since mid-2012 as tame inflation and low interest rates boosted sentiment in a recovering economy.
The composite consumer index (CCSI), compiled from a survey by the Bank of Korea, rose to 106 in October from 102 the previous month -- the highest index reading since May 2012, the Bank of Korea said on Monday.
A reading above the neutral line of 100 indicates consumers feel more positive in the coming month than the long-term average sentiment calculated from 2003 to 2012.
The central bank's index has so far stayed above the neutral line this year and was last below 100 in December 2012.
South Korea expects its latest batch of month-end indicators this week, including industrial output and trade data which are all expected to "surprise on the upside," Credit Suisse said in a note.
The strong consumer sentiment data came in just after the Bank of Korea estimated the South Korean economy grew a seasonally adjusted 1.1 percent in the third quarter of the year, mostly supported by domestic demand.
"For consumption to improve you have to have better incomes, whether that comes from employment or something else -- you have to have that spending power," said Im No-jung, an economist at IM Investment & Securities in Seoul.
"The influence from better exports down the road will increasingly spread to households and in turn result in more spending."
Actual inflation remaining well below the bottom tier of the central bank's inflation target of 2.5 to 3.5 percent has kept sentiment positive, along with low expected inflation of 2.9 percent reported in this month's survey.
The Bank of Korea lowered interest rates to the current 2.50 percent when it embarked on an easing cycle last year, bringing rates to their lowest since early Jan. 2011 and easing the debt burden on households.
Fourth-quarter growth is expected to show a steady improvement as conditions in advanced economies pick up, and in return, boost the export-reliant local economy, even if it is at a modest pace.
However, muted spending by South Korean households and a still-soft property market are seen as underlying hazards to growth -- although government policies have contained the more severe anxieties.
"Households are still pressured by household debt and a depressed property market. We are seeing improved employment but that hasn't been linked to better incomes yet," said economist Im.
Unemployment in South Korea has fallen this year, with the jobless rate in September dropping to a nine-month low. However, the numbers have mostly been boosted by babyboomers returning to the job market, data shows.
September housing prices also edged up, as subdued conditions for the local property market continue.
Reflecting consumers' cautious outlook, disposable income for South Koreans in the April-June period grew for a ninth quarter, but households continued to pay down debt rather than spending freely.
Public utility costs and industrial goods were seen as the factors most likely to drive up spending, the central bank's survey showed. Utility costs have dominated the survey for most of the year, putting pressure on policymakers.
"In the October CSI, we find that the expectations of the domestic economy actually deteriorated, which suggests consumers expect improvements in conditions to be externally driven," said Ronald Man, an economist at HSBC in Hong Kong.
"But here we expect growth in key export markets to pick up only gradually, putting a limit on how much further consumer confidence can rise through year-end."
The Bank of Korea said it polled more than 2,000 households across the nation for sentiment survey from Oct. 10 to 18. (Additional reporting by Se Young Lee; Editing by Eric Meijer)