(For a full table, double-click [ID:nSEO10935])
* Q2 growth unexpectedly strong, fastest since Q4 2003
* C. bank sees less severe 2009 contraction, better 2010
* Says outlook for rest of 2009 still uncertain
* Analysts see low chances for rate rise in 2009
(Updates with quotes, details, markets)
By Cheon Jong-woo
SEOUL, July 10 (Reuters) - South Korea's economy grew at its fastest clip in 5-½ years in the second quarter but demand and investment are expected to remain weak for the rest of the year, helping to keep chances of an early interest rate rise at bay.
Asia's fourth-largest economy will shrink by 1.6 percent this year, less than a 2.4 percent contraction forecast in April, aided by the unexpectedly strong second quarter performance, the Bank of Korea said on Friday in revised growth estimates.
Gross domestic product in April-June probably expanded by a seasonally adjusted 2.3 percent over the previous quarter, the best since late 2003, but the pace will likely slow for the rest of the year, the central bank said.
"The additional boost to growth from the government's fiscal stimulus measures will be very limited for the second half. The private sector has yet to secure self-recovery momentum," Lee Sang-woo, head of the research department at the central bank, told reporters.
He ruled out chances of the economy slipping back into a quarterly decline for the rest of the year. The economy suffered its fastest quarterly decline in nearly 11 years in the fourth quarter last year, shrinking 5.1 percent.
BOK Governor Lee Seong-tae told reporters on Thursday that the outlook for the export-dependent economy remained uncertain because of still fragile demand from Western economies. [ID:nSEO87832]
The BOK also raised its forecast for next year's GDP growth to 3.6 percent from 3.5 percent previously, but even that figure indicates the once high-flying economy would expand by less than 2 percent for the two-year period.
Analysts said the weak outlook and expectations that inflation will remain benign would allow the Bank of Korea to refrain from raising interest rates later this year despite early signs of a pick-up in the property market and mortgage lending.
The BOK has kept its base rate
Central banks around the world are on the lookout for any spikes in inflation fueled by massive government stimulus spending, but they are reluctant to raise rates too soon and risk choking off a nascent economic recovery.
(For a graphic on South Korea's GDP and export trends, click http://graphics.thomsonreuters.com/079/KR_RGDP0709.jpg)
HOUSING PRICES RISE
Market watchers said the upgraded economic forecasts did
not change their view that interest rates would not be raised
anytime soon. September treasury bond futures
"Even thought the BOK revised up forecasts, it expects the pace of economic recovery to slow down in the second half. So, there is no reason to raise interest rates now," said Park Sang-hyun, chief economist at HI Investment & Securities.
South Korean housing prices rose for the past three consecutive months on economic recovery hopes combined with record-low borrowing costs, but analysts said property prices alone would not force the central bank to raise rates.
The Bank of Korea next reviews its rate on Aug. 11.
The central bank raised its consumer inflation forecast for this year to 2.9 percent from 2.7 percent and next year's to 3.0 percent from 2.5 percent, still relatively low compared to its 2007-2009 target set at between 2.5 percent and 3.5 percent.
The BOK will set the next three-year inflation target soon after consultation with the government.
The new forecasts came as authorities and global investment banks have been upgrading views on the South Korean economy, citing signs that exports are recovering and as stimulus measures kick in.
The government now expects the economy to contract by 1.5 percent this year, compared with its previous forecast of a 2.0 percent fall. [ID:nSEO169321] (Graphic by Catherine Trevethan; Editing by Yoo Choonsik & Kim Coghill)