UPDATE 4-S.Korea readies monetary tightening as outlook improves

* All 26 analysts surveyed saw BOK keeping rates steady at 0.50%

* Analysts see rate hikes from 2022

* BOK sees economy logging fastest expansion in over a decade

* Inflation outlook for 2021 raised to 1.8% vs 1.3% before (Recasts after Governor Lee’s news conference)

SEOUL, May 27 (Reuters) - South Korea’s central bank upgraded its economic outlook and projected high consumer inflation, signaling an eventual tilt towards tightening to end its run of pandemic era record-low interest rates.

Bank of Korea Governor Lee Ju-yeol said the bank is preparing to pull back on the extraordinary stimulus extended during the pandemic in the face of accelerating inflation and a build-up of dangerous imbalances.

“Going forward, I can’t be precise about the timing but adjusting monetary policy in an orderly manner would be an important task as macroeconomic environment and financial stability conditions change,” Lee said in a news conference.

The central bank earlier on Thursday kept its base rate at a historic low of 0.50%, as widely expected.

The BOK now sees Asia’s fourth-largest economy logging the fastest annual growth this year since 2010 and has upgraded its outlook to 4.0% from the 3.0% projected in February.

Consumer inflation is seen at 1.8%, up from the earlier 1.3% projection.

South Korea’s new talk of tightening comes as central banks in New Zealand, UK and Norway also raise the prospects of moves away from emergency monetary settings.

The BOK, like its counterparts worldwide, faces the critical question of when to withdraw loose monetary policy as inflation expectations grow.

The Bank of Canada last month became the first major central bank to pull back extraordinary stimulus launched during the pandemic, a move followed by Iceland last week.

Hawkish views from the BOK prompted investors to place bets on higher rates earlier on Thursday, although Governor Lee’s confirmation that there were no dissenting votes on the rate decision prompted some tempering of those expectations.

“Investors were waiting for a faster-than-expected rate hike but it now looks like (the BOK) will more likely hold rates for the rest of the year and see how situations develop,” said Paik Yoon-min, fixed-income analyst at Kyobo Securities, who sees the BOK raising interest rates in the second half of 2022.

Asked if the BOK could raise interest rates before the U.S. Federal Reserve tightens, Governor Lee said “it’s more appropriate to make monetary policy decisions based on local economic conditions.”

The central bank sees the stronger recovery powered by stellar chip exports and better consumption, while the government’s 15 trillion won ($13.41 billion) extra budget will also boost growth by up to 0.2 percentage points.

President Moon Jae-in this month said the economy could expand more than 4% this year and vowed to boost spending if needed to increase jobs, as the country struggles with hundreds of new coronavirus cases daily.

Despite the pandemic challenges, South Korea’s economy is still heating up with April exports surging at their sharpest pace in more than a decade, while consumer inflation accelerated to a near-four year high driven by higher energy and food costs.

Most analysts in a Reuters poll see the BOK raising rates at least once in 2022.

$1 = 1,118.2100 won Reporting by Cynthia Kim; Editing by Sam Holmes