World Crisis Online

By Eunkyung Seo

(Updates with won’s gain to highest close since 2008 from first paragraph.)

April 27 (Bloomberg) — South Korea’s economic growth accelerated in the first quarter, bolstering the case for another interest-rate increase and driving the won to the strongest close since 2008.

Gross domestic product rose 1.4 percent from the previous quarter, when it advanced 0.5 percent, the Bank of Korea said in Seoul today. The median estimate of 10 economists in a Bloomberg News survey was for a 1.5 percent gain. The economy grew 4.2 percent from a year earlier.

Rising food and energy costs and inflows of capital are impeding President Lee Myung Bak’s “war” on inflation, with price increases breaching the central bank’s 4 percent target each month this year. Governor Kim Choong Soo’s policy board meets May 13 to decide whether to raise rates for the third time this year, while officials also need to gauge the risk that a stronger currency will hamper exporters such as Samsung Electronics Co.

“Today’s GDP figures will likely give the central bank more confidence that another rate hike, possibly in May, would not derail the solid economic growth,” said Kim Dong Whan, a fixed-income analyst at HI Investment & Securities Co. in Seoul. “Given the strengthening economy, the won may test a level of 1,050 per dollar but the government will likely intervene to cap the gains.”

‘Solid’ Growth

The won rose 0.6 percent to 1,079.45 as of the 3 p.m. close in Seoul, the biggest gain in a week, after a slide yesterday triggered by the financial regulator announcing an audit of holdings of currency derivatives at four banks. The Kospi share index closed little changed.

Manufacturers’ confidence advanced to the highest level in eight months, a separate central bank report showed today.

“The economy is on a solid growth track and will likely show a steady advance in the coming months,” said Kim Young Bae, director general at the Bank of Korea. Export growth was “strong” in the first quarter and private consumption increased steadily, the central bank said in a statement.

The won has gained about 3.2 percent against the dollar in the past month, the most of Asian currencies, aiding the government’s efforts to tame inflation by cutting the cost of imports. Exports jumped 30 percent to a record $48.6 billion in March and probably rose 24 percent in April, according to the median forecast of eight economists surveyed by Bloomberg News.

Interest-Rate Pause

The central bank last month boosted the benchmark seven-day repurchase rate to 3 percent from 2.75 percent, adding to efforts by nations across Asia to counter overheating risks in the region leading global growth. Officials paused this month.

The rate needs to climb to “at least” 4 percent this year, according to Kim Tae Joon, president of Korea Institute of Finance, South Korea’s largest private financial think tank.

The government’s campaign to tame inflation has included price controls on power and gas charges. Such measures may have a limited impact as oil and other raw-material prices will likely rise further and producers will try to pass on higher costs to consumers, according to June Park, an economist at Woori Investment & Securities Co. in Seoul.

President Lee declared “war” on prices in January, urging policy makers to contain inflation at 3 percent to protect families on low incomes. Price rises announced by Korean companies highlight the challenge he faces, as the central bank’s Kim forecasts a 3.9 percent level for the full year.

Pohang-based Posco, the world’s third-biggest steelmaker by output, has raised steel prices on raw-material costs and British American Tobacco Korea has pushed up tobacco prices.

–With assistance by Sarina Yoo in Seoul. Editors: Paul Panckhurst, Nerys Avery.

To contact the reporters on this story: Eunkyung Seo in Seoul at eseo3@bloomberg.net

To contact the editor responsible for this story: Paul Panckhurst at ppanckhurst@bloomberg.net