South Korean factory output falls at fastest pace in 19 months, November rate hike in doubt

A factory is seen in Incheon, South Korea, May 30, 2016. REUTERS/Kim Hong-Ji

SEOUL (Reuters) - South Korea’s factory output in September shrank the most in 19 months and missed market expectations by a large margin as domestic demand weakened, casting doubt over the central bank’s need to raise rates at its next policy meeting.

The industrial output index fell by a seasonally adjusted 2.5 percent in September from a month before, data showed on Wednesday, swinging from a 1.3 percent gain in August and falling faster than the median 0.5 percent drop expected in a Reuters survey.

It was the sharpest drop in the index since a 3.0 percent contraction in February last year.

The poor September data, released as the local stock markets were set to mark their biggest monthly decline since the 2008 global crisis, could put the pressure on the Bank of Korea to take a more cautious stance in reviewing monetary policy.

“This will absolutely affect the (Bank of Korea’s) interest rate decision going forward,” said Oh Suk-tae, chief Korea economist at Societe Generale, adding “Who can say the economy is doing well after seeing this?”

Analysts have forecast the Bank of Korea would raise the policy interest rate at its next meeting in late November, after two of its seven board members voted to raise interest rates to slow property prices at the latest policy meeting on Oct. 18.

Ex-factory shipments of the manufactured goods for the domestic market fell a seasonally adjusted 2.6 percent on-month whereas those for export markets rose 1.6 percent, according to the Statistics Korea data.

Retail sales, also released by the statistics agency on Wednesday, dropped 2.2 percent in September from August, turning around from three months of relatively small gains and marking the worst reading since December last year.

Additional reporting by Hayoung Choi; Editing by Shri Navaratnam and Sam Holmes