Business and Finance

South Korea’s economy expanded at the fastest pace in seven years, stoking speculation the central bank will raise borrowing costs for the first time since the collapse of Lehman Brothers Holdings Inc.

Gross domestic product increased 2.9 percent in the third quarter from three months earlier, when it grew 2.6 percent, the central bank said in Seoul today. That was the fastest pace since the first quarter of 2002 and compared with a median estimate of 1.9 percent growth in a Bloomberg News survey. From a year earlier, GDP rose 0.6 percent.

South Korea has led a regional rebound with China and Singapore as companies including Hyundai Motor Co. and Samsung Electronics Co. reported surging profits, boosted by exports. South Korea may become the second Group of 20 nation after Australia to raise its benchmark interest rate since the height of the global financial crisis, BNP Paribas SA said this month.

“The bigger-than-expected GDP number definitely adds more weight for an interest-rate increase,” said Go You Sun, an economist at Daewoo Securities Co. in Seoul, who had previously forecast the central bank to raise rates early in 2010. “The number today made a clear basis for the Bank of Korea to justify a rate increase.”

Record Profit

Hyundai, South Korea’s largest automaker, posted record third-quarter net income of 979.2 billion won ($827 million). Hynix Semiconductor Inc., the world’s second-largest computer- memory chipmaker, on Oct. 23 reported its first quarterly profit in two years on higher prices.

The nation’s Kospi stock index climbed 1.4 percent at 11 a.m. in Seoul, taking the year’s gains to 48 percent. The won was little changed against the U.S. dollar at 1,181.55, having risen 20 percent in the past 12 months.

Policy makers around the world are debating how quickly to withdraw monetary and fiscal stimulus measures to secure economic recoveries while avoiding an acceleration in inflation.

Bank of Japan policy makers this week are forecast to consider an announcement ending their purchases of corporate bonds in December, and economists including those at Credit Suisse Group AG predict China’s central bank will begin restraining credit growth in that country by year-end.

The Federal Reserve has already announced a phase-out of some of its emergency programs, while retaining a commitment to keep interest rates near zero for an “extended period.”

Health of Economy

South Korea’s government says an unwinding of expansionary policies would be “premature,” while central bank Governor Lee Seong Tae said last week keeping rates at a record-low for too long isn’t healthy for the economy.

Low interest rates have spurred consumer borrowing, with bank lending to households expanding for a seventh straight month in August before falling in September.

“I don’t think keeping rates too low for too long is good,” Lee told lawmakers at a parliamentary audit on Oct. 23. He said earlier this month a rate increase will be “more than” the usual 25-basis-point move.

South Korea’s exports gained 5.1 percent in the third quarter from the previous three months, when they rose 14.7 percent, today’s report showed. Corporate investment in factories and equipment climbed 8.9 percent, compared with a 10.1 percent in the second quarter.

Private Consumption

Private consumption advanced 1.4 percent from the second quarter. Government spending fell 0.8 percent and construction investment dropped 2.1 percent.

South Korea’s rebound comes as Singapore raised its 2009 economic forecast after gross domestic product expanded for a second consecutive quarter in the three months through September. China’s economy expanded at 8.9 percent in the third quarter, the fastest pace in a year as stimulus spending and record lending growth helped the nation lead the world out of recession.

Sales at South Korea’s major department stores rose in September for a seventh straight month and exports fell at the slowest pace in 11 months in September. Manufacturers’ confidence climbed to the highest level in two years, earlier reports showed.

Kia Motors Corp., South Korea’s second-biggest automaker, posted record profit in the three months to Sept. 30 as global stimulus measures boosted demand for cars. Samsung Electronics Co., Asia’s biggest maker of chips, flat screens and mobile phones, said earlier this month operating profit more than doubled to as high as 4.3 trillion won in the same period.

The central bank and the government have upgraded their economic forecasts for this year. Finance Minister Yoon Jeung Hyun said early this month the economy is likely to contract less than 1 percent in 2009 and Governor Lee says he shares that view.

To prevent the economy from sliding into a recession, the central bank cut the benchmark interest rate by 3.25 percentage points between October and February to a record-low 2 percent and the government boosted spending.

The Bank of Korea will meet on Nov. 12 to review borrowing costs. South Korea hasn’t had a rate rise since August 2008.

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