REFILE-UPDATE 2-South Korea weak June data fan rate cut talk

Mon Jun 30, 2014 11:43pm EDT

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(Refiles to fix typographical error in second paragraph)

* June exports +2.5 pct y/y (Reuters poll: +5.1 pct)

* June annual inflation at 1.7 pct (Reuters poll: 1.9 pct)

* June HSBC/Markit mfg PMI at s/adj 48.4, a 10-mth low

* Growing view for interest rate cut

By Christine Kim and Choonsik Yoo

SEOUL, July 1 (Reuters) - South Korean exports, inflation and manufacturing activity for June all showed Asia's fourth-largest economy was losing momentum, lending support to a vocal minority view that the central bank may be forced to cut interest rates to spur growth.

After a strong start to the year, the export-reliant economy has been hobbled in recent months by a drum beat of negative data, prompting markets to reassess the outlook for monetary policy and gross domestic product.

Shipments in June grew 2.5 percent over a year earlier, trade ministry data showed on Tuesday, rebounding after a 1.0 percent fall in May. Growth, however, fell well short of a median 5.1 percent rise tipped in a Reuters survey of analysts, hurt by a decline in exports to China and Europe.

"Today's trade and inflation data will lend more strength to the rate cut view for sure. In our case, we see a rate cut as soon as August," said Jun Min-kyoo, an economist at Korea Investment & Securities. He was one of a few economists who had expected a rate cut even before the June data was released.

Domestic money market rates are pricing in an increasing possibility of a cut in the policy interest rate in coming months, although the dominant market view is that the Bank of Korea will hold steady for an extended period before hiking next year.

The policy rate has been kept unchanged at 2.50 percent since a cut by a quarter of a percentage point in May last year.

China's economic slowdown and Europe's uneven recovery offset much of the boost to South Korean exports from sustained U.S. growth at a time when domestic demand remains shaky in the aftermath of a deadly ferry disaster.

Seoul's financial markets showed a muted reaction to the batch of weak indicators. The won was almost flat against the dollar on the day while the front-end futures on three-year treasury bonds rose a slight 0.04 point to 106.47.

Exports to China, South Korea's largest market, fell 1.1 percent in June from a year before, declining for a second consecutive month. Shipments to the European Union also dipped 2.2 percent after surging 32 percent in May, while sales to the United States rose 15.8 percent on-year.

Inflation data released separately by the statistics agency on Tuesday underscored a recent pull-back in domestic demand.

Annual consumer inflation in June held steady from May at 1.7 percent, below the bottom of the central bank's 2.5 percent-3.5 percent target and lower than a median 1.9 percent tipped in the Reuters survey.

BOK CAUTIOUS

The Bank of Korea, the nation's central bank, is now widely expected to lower its annual economic growth forecast of 4.0 percent for this year, when it next publishes revised estimates on July 10.

South Korea's economy, a major exporter in Asia, grew 0.9 percent on-quarter each in the first quarter of this year and the fourth quarter of last year, higher than the average of 0.5 percent for 2012. It expanded 3.0 percent in 2013.

The weak demand both from abroad and at home was confirmed by a private-sector survey on Tuesday as the HSBC/Markit purchasing managers' index on South Korea's manufacturing sector fell to a 10-month low in June.

Government officials have expressed concern about the slowing recovery, indicating they are prepared to offer steps to support the economy.

In comments earlier this month, central bank governor Lee Ju-yeol acknowledged the recovery had "paused," but said it was premature to make a call on whether the economy was headed for a slump.

Central bank officials have been careful not to suggest that rates could be cut further, fearing a possible spike in inflation and as lower borrowing costs could stoke already heavy household debt.

Bond prices have risen in recent weeks on expectations that the central bank would keep the policy rate low for longer, or even cut it.

The yield on one-year treasury bonds was last quoted at 2.579 percent on Monday, sharply down from a 2014 closing high of 2.680 percent seen in early March although up from 2.565 percent set on June 20.

Adding to the headwinds of still-sluggish demand from overseas markets, South Korea's consumer spending took a hit as domestic tourism suffered after the April 16 sinking of a ferry killed more than 300 people.

Statistics agency data showed last week that the retail sales index rose a seasonally adjusted 1.4 percent in May over the previous month but failed to recoup a 1.6 percent loss set in April.

(Reporting by Christine Kim and Choonsik Yoo; Editing by Shri Navaratnam)

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