South Korean factory output rose a seasonally adjusted 1.0 percent in October, official data showed on Tuesday, a second straight monthly rise that supported the central bank's tightening bias and knocked bond prices lower.
The rise in industrial production beat a median forecast of an 0.8 percent increase in a Reuters poll and added to signs of strength in the economy after September's 2.4 percent rise.
The Organisation for Economic Co-operation and Development (OECD) raised its growth forecasts for Asia's fourth-largest economy for this year and next, citing a recovery in private consumption and a rebound in exports in a report on Tuesday.
Still, economists said the Bank of Korea would probably wait until early 2006 before raising interest rates again. It increased rates in October for the first time in more than three years and holds its next policy meeting on December 8.
"The data reinforces prospects for sustained economic growth in the fourth quarter and supports our view that the central bank will probably raise interest rates in the first quarter," said Goh You-sun, an economist with Daewoo Securities.
Lee Sang-jae, a senior economist at Hyundai Securities, said the central bank might keep rates on hold until after the Lunar New Year holidays in late January, when demand for cash from companies picks up to pay bonuses to workers.
The finance ministry played down the economic recovery, a move viewed by analysts as an effort to cap bond yields ahead of planned borrowing to plug a shortfall in tax revenue.
"When taking into account the effect of low base figures and other factors, the magnitude of recovery does not appear strong and the pace of economic recovery has not yet spread to all sectors," the ministry said in a statement.
It also pointed out that industrial production excluding computer chips rose only 1.6 percent in October from a year earlier, even lower than a 1.8 percent rise in September.
The statement, along with a call by Finance Minister Han Duck-soo on Monday for officials to avoid overstating the pace of economic growth, came as the ministry plans to borrow an extra 3.5 trillion won ($3.37 billion) next month.
Despite the comments, treasury bond prices fell, with the benchmark three-year treasury yield finishing up three basis points at 5.04 percent. The yield has risen one full percentage point in three months.
Bond investors are wary ahead of November exports and inflation figures due out on Thursday, which analysts expect to provide even more ammunition for central bank policy board members advocating higher interest rates.
The Paris-based OECD raised its forecasts for South Korean economic growth in 2005 and 2006 to 3.9 percent and 5.1 percent respectively from its October projections of 3.7 percent and 4.9 percent.