* C.bank outlines position in draft report seen by Reuters
* Market sees risk of rate rise as early as November
* Could be first G20 central bank to raise rates
* News comes as president to attend G20 summit this week (Adds analysts, updates markets)
By Chang Tae-min and Cheon Jong-woo
SEOUL, Sept 22 (Reuters) - South Korea's central bank said it was ready to raise interest rates to help calm property prices, a clear signal it might soon tighten policy despite heavy pressure from the government for caution.
The comments were in a draft report to parliament obtained
by Reuters on Tuesday and the news sent December treasury bond
futures
They come at a sensitive time for President Lee Myung-bak, who is in the United States to attend this week's G20 summit having urged unity with the grouping over withdrawing the emergency measures put in place to fight the global financial crisis.
Markets see a risk that the Bank of Korea will lift rates from a record low of 2.0 percent as early as November, making it the first central bank in G20 to tighten monetary policy since the global downturn started a year ago.
"We will take proper steps (against rising property prices) including monetary policy if necessary, taking a look at conditions of financial markets and the economy in the future," the Bank of Korea said in the report.
House prices in South Korea have been rising for five straight months and stand just below year-earlier levels, defying government efforts so far to temper the increase.
That touches on an intensifying global debate about focusing monetary policy on pricking asset bubbles, a shift away from the conventional goal of focusing it to control broad inflation.
President Lee and his finance minister have repeatedly argued that the economic recovery is too fragile to risk tighter policies now and they want to be sure the private sector is investing and creating jobs before removing this support.
The central bank report, written in September but undated, predicted mortgage lending would increase further on expectations of a rise in property prices.
On Saturday, a local newspaper had reported that the Bank of Korea had told lawmakers it may have to raise interest rates to put the brakes on a property boom and borrowing frenzy.
"Many investors expect a higher rate within this year as the Bank of Korea appears to be using anything as an excuse to raise rates," said Kong Dong-rak, a fixed-income analyst at Taurus Investment & Securities.
"The government will keep warning against a higher rate. But if the Bank of Korea does not raise interest rates in November or the BOK does not make hawkish comments, that will lead to doubts over its stance on tightening policy itself," he added.
Analysts expect the central bank to wait for more economic data, including third quarter GDP due late in October, and see the impact of recent steps to slow the property markets before raising rates.
"It would be hard to ignore concerns over the impact on the economy and the country needs to cooperate with other countries," said Park Sang-hyun, chief economist at HI Investment & Securities.
Domestic money market rates have been rising in recent weeks as a series of upbeat economic indicators prompted investor bets on a rate hike.
The central bank is independent by law, so can ignore government pressure in theory. However, it is also obliged to implement policy in harmony with the government.
Analysts say the president is keen for the central bank to toe the line partly because South Korea will host the G20 summit in 2010, an opportunity to boost its image as a leading emerging economy.
G20 finance ministers said at a meeting earlier this month that stimulus should stay in place. [ID:nL5327479]
But, analysts also argue, Bank of Korea Governor Lee Seong-tae can resist government pressure since his term ends in March.
The economy has experienced a sharp turnaround in fortunes since the crisis hit the exporter with full force earlier this year and most analysts have raised their expectations for the economy sharply from a deep contraction to a more shallow one.
Reflecting these improving prospects, the Asian Development Bank (ADB) on Tuesday upgraded its 2009 GDP forecast for South Korea to a fall of 2.0 percent from a previous fall of 3.0 percent. It sees 4 percent growth in 2010. [ID:nSP464566]
Most analysts predict the Bank of Korea will start raising
the benchmark 7-day repurchase agreement rate
The Bank of Korea cut the rate by 3.25 percentage points between last October and February this year and has since held it steady. It reviews policy on Oct. 9. (Editing by Jonathan Thatcher and Neil Fullick)