(Refiles to give nominee's full name in 2nd paragraph)
* Lee Ju-yeol was deputy to current governor for two years
* Improving communication with markets, independence in focus
* Inflation has been low, but expected to rise later this year
By Choonsik Yoo and Se Young Lee
SEOUL, March 3 (Reuters) - South Korea's president nominated a 61-year-old technocrat with a 35-year career inside the Bank of Korea as its next governor on Monday and people who worked with the former deputy bank chief said he would likely sharpen the bank's independence.
Lee Ju-yeol will succeed incumbent Kim Choong-soo, a close ally of former President Lee Myung-bak who was frequently criticised in Korean media for being too close to the government and for failing to respond to a spike in inflation.
Although little is known of Lee's voting record, due to the fact that the deputy chief traditionally sides with the governor in Bank of Korea (BOK) rate-setting meetings, he was viewed as being less likely to cut interest rates by market particpants who marked bond prices lower on that view.
"He tried to uphold his strong belief that the central bank's value lies with the inflation management among others," Kim Dae-sik, who was on the same monetary policy committee with Lee for two years, said by telephone.
Lee's term as senior deputy governor ended in April 2012, and since then he has been an economics professor at Yonsei University.
Young Sun Kwon, an economist at Nomura International who worked at the BOK for 10 years, said of Lee: "Based on his long career at the research and international research areas, I remember he strongly believed the central bank should contribute to the national economy by managing inflation properly instead of reacting to the temporary volatility in the economic growth."
Lee, who has a master's degree in economics from Pennsylvania State University, does not appear to have published much while working at the Bank of Korea and has made very few statements on monetary policy.
South Korea's central bank has kept its policy rate steady at 2.50 percent for the past nine meetings, although economists have forecast that rates will rise in the third quarter of this year.
Korea's parliament will hold a public hearing on Lee's appointment. Although it has no right to block the appointment, the hearing can still influence public opinion.
The Bank of Korea's main mission is to ensure that inflation and the financial system remain stable.
South Korean inflation has remained well below the bank's target range of 2.5 percent to 3.5 percent and stood at 1.1 percent year-on-year in January.
The pace is expected to pick up to around 3 percent later this year as an anticipated economic recovery materialises. The central bank has forecast the country's economy, Asia's fourth-largest, would grow by 3.8 percent this year and 4.0 percent next year, compared with 2.8 percent in 2013.
The independence of Kim, the current governor, was questioned by some of his fellow rate setters and by economists.
Although Lee denied he had been influenced by the government while deputy governor, Korean newspapers reported that when stepping down, he said in a letter to central bank employees "I feel responsible for the outside assessment that (the bank) has fallen short of carrying out its duty of keeping prices stable."
On Monday, yield on the benchmark 10-year government bonds ended up 5.4 basis points at 3.552 percent, while lead March futures on three-year treasury bonds ended down 0.18 points at 105.80.
"Bank of Korea officials tend to be hawkish, and the market appears to think that Lee was the most hawkish of all the names that had been floating around," one local bank dealer said. "At the least, rate cuts now look unlikely." (Additional reporting by Jungmin Jang; Editing by David Chance and Richard Borsuk)