* May industrial output -2.7 pct m/m (Reuters poll: -0.5
* May data adds to signs of slowing economic recovery
* Analysts see more chances of rate hike being delayed
* Next rate move still likely to be an increase
(Updates with market reaction, new economist comment, forecasts
By Christine Kim and Choonsik Yoo
SEOUL, June 27 South Korea's industrial output
shrank the most in over five years in May, adding to signs the
economic recovery is losing momentum and lending credence to the
growing view the central bank would delay the start of rate
hikes to support growth.
The latest gloomy reading on the manufacturing sector joins
a recent slew of weak data, including tepid exports and a sharp
dip in business confidence, clouding the outlook for Asian's
Industrial output fell by a seasonally adjusted 2.7 percent
in May from April, the Statistics Korea data showed on Friday,
the worst monthly decline since a 10.5 percent drop in December
2008 and well below market expectations for a 0.5 percent fall.
Bond futures rose and one offshore investment bank pushed
back the timing for an expected interest rate increase to 2015,
from late this year -- a view shared by a significant minority
"Judging from all the indicators so far this quarter, we
have revised down our GDP forecast for this year from the
previous 3.7 percent to 3.4 percent and delayed the expected
time of a rate hike to the second quarter of 2015 from the final
quarter of this year," said Raymond Yeung, senior economist at
Australia and New Zealand Banking Group in Hong Kong.
The Bank of Korea, the nation's central bank, is also widely
expected to lower its annual economic growth forecasts of 4.0
percent for this year, when it next publishes revised estimates
on July 10.
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 economic recovery has "paused," but
said it was premature to make a call on whether the economy was
about to enter into a slump.
Reflecting the cooling market expectations for a rate hike
this year, the one-year treasury bond yield fell
to 2.565 percent on June 20, the lowest closing level in 13
months, from around 2.635 percent seen early this month. It
ended Thursday's session at 2.590 percent and stood at 2.582
percent as of 0702 GMT on Friday.
The won and stocks showed little reaction to
the latest data.
Tepid global demand and relatively lacklustre consumer
spending at home have raised concerns of a rapid loss of
momentum in the South Korean economy this quarter following
strong growth over the past year.
Consumer sentiment has lagged in recent months as the public
mood darkened after the April 16 sinking of a ferry that killed
more than 300 people. The deadly accident - the worst in two
decades - hurt domestic tourism and related services, putting a
dampener on overall economic activity.
Officials at major companies such as smartphone maker
Samsung Electronics Co Ltd and steelmaker POSCO
have also recently warned of a delay in the global
Still, growth is set to top last year's 3.0 percent rate
which explains why some analysts still expect a rate hike at the
end of this year.
Rising inflationary pressures and expectations that exports
will start to add to demand have seen the hawkish camp reluctant
to change their views.
Inflation hit a 19-month high in May, rising an annual 1.7
percent and heading toward the Bank of Korea's target band of
2.5 to 3.5 percent. The BOK has said inflation will track within
the band in the second half of the year.
Analysts were split about the timing for an interest rate
increase in the latest Reuters survey conducted before the June
12 policy meeting. In the poll, which didn't include ANZ bank,
14 of 27 picked a hike for this year and the balance predicted a
tightening next year.
The central bank has kept the rate steady at 2.50 percent
since cutting it by 25 basis points in May last year.
South Korea's economy grew 0.9 percent each in the first
quarter of this year and the fourth quarter of 2013, slower than
a 1.1 percent gain in the third quarter of 2013 but well above
the 0.5 percent average rise seen in 2012.
Exports have been sluggish in recent months, reflecting an
uneven global economic recovery.
Analysts expect South Korean exports to bounce 5.1 percent
this month over a year ago, compared with an actual 1.0 percent
loss in May, a Reuters survey showed this week. The government
will release June export figures on July 1.
Most analysts see only a slim chance of the BOK cutting
interest rates soon because of rising inflation pressure.
"(The May output reading) was a bit worse than we thought
but you can't say it was so serious as to create a serious
problem or change the whole picture," said Kim Chul-ju, head of
the finance ministry's economic policy bureau.
A central bank official also said the May data was affected
a lot by "non-economic factors", referring to long holidays -
the most since 2000 for the month of May according to an
economist at Korea Investment and Securities.
The statistics agency data also showed that service-sector
output rose by a seasonally adjusted 0.6 percent in May on a
monthly basis after a revised 1.2 percent decline in April.
(Editing by Shri Navaratnam)