IMF upgrades South Korea economy forecast

SEOUL, Aug 9 - The IMF upgraded its 2009 economic forecast for South Korea for the second time in a month on Sunday, and said concerns about rising housing prices can be best addressed with prudent regulations.

The International Monetary Fund also said in a report released after its annual policy review that the country's economic policy should continue to support growth until Asia's fourth-largest economy secures a self-sustained recovery.

The comments came as domestic bond yields have risen on speculation among investors that the recovering economy from the crisis and the rising housing prices would persuade the central bank to start to lift interest rates soon.

"While a moderate recovery is likely to take hold next year, in line with global growth prospects, the possibility of another bout of global risk aversion poses a downside risk," it said.

"Accordingly, Directors agreed that macroeconomic policies should continue to focus on supporting growth until a self-sustained recovery is firmly established."

The IMF raised its forecast for South Korea's 2009 economic growth to a contraction of 1.8 percent from a fall of 3.0 percent, which was an upgrade last month from a 4.0 percent drop seen previously.

It praised South Korea's swift implementation of a series of emergency schemes aimed at protecting the local economy since the collapse of Lehman Brothers in mid-September sent the global economy plunging into the worst downturn in decades.

It advised South Korea to deal with the rising housing prices with regulatory measures.

"While vigilant monitoring of monetary conditions continues to be necessary, with their impact on asset prices taken into account in monetary policy deliberations, concerns about rising house prices are best addressed through prudential regulations, pending housing market reforms."

South Korean housing prices rose for a fourth consecutive month in July, data showed early this month, just a few weeks after the central bank expressed his concerns about the fast growth in mortgage lending.

The Bank of Korea held the benchmark interest rate steady at a record low of 2.0 percent for the past five consecutive months after cutting the 7-day repurchase agreement rate by a total of 3.25 percentage points since October last year.

It next reviews the rate on Tuesday.

For next year, the IMF maintained its view that the economy would return to growth with a 2.5 percent expansion.

This compares with the Bank of Korea's projection of a 1.6 percent fall and the finance ministry's forecast of a 1.5 percent drop. Private-sector economists have also rushed to upgrade their forecasts, with Morgan Stanley now predicting a 0.5 percent fall.

In July, Morgan Stanley upgraded its forecast for South Korea's economic growth in 2009 to -0.5 percent from -1.8 percent and to 5.0 percent from 3.8 percent in 2010. (Reporting by Seo Eun-kyung and Yoo Choonsik; Editing by Mike Nesbit)