July 6 (Bloomberg) -- The Bank of Korea will raise interest rates in November to restrain inflation as the economy rebounds, becoming the first Asian central bank to unwind policy easing, Nomura Holdings Inc. economist Kwon Young Sun said.

The bank undertook the most aggressive easing since it began setting a policy rate a decade ago, cutting the benchmark to a record-low 2 percent in February. Lower rates, fiscal stimulus and the won’s drop helped South Korea avoid a recession in the first quarter, with gross domestic product edging up 0.1 percent from the previous three months, in contrast to declines in other Asian economies including Japan, Singapore and Taiwan.

“A weaker won and improved technology helped exporters gain a bigger share in global markets while policy steps helped shield the economy from further deterioration,” Hong Kong-based Kwon said in a phone interview on July 3. “That’s what has made it possible for Korea to outperform. South Korea will be first in Asia to raise interest rates”

The local currency has declined 27 percent against the dollar since the start of last year, increasing returns from overseas sales of Korean-made cars, televisions and mobile phones. Exports climbed 17 percent in June from May to the highest level since October, according to Bloomberg calculations based on the July 1 trade report.

Fastest Since 2002

Kwon said the nation’s GDP growth probably topped 3 percent in the second quarter, which would be the fastest pace since 2002. Optimism the economy may rebound drove the Kospi stock index up 15 percent in the three months ended June 30, the best performance since the second quarter of 2007.

The stock index rose 0.8 percent to 1,431.40 at 9:37 a.m. in Seoul. The won was little changed at 1,266.10 against the dollar. The yield on three-year government bonds fell 1 basis point to 4.03 percent.

Keeping rates too low could fan excessive lending and stoke a bubble in asset prices, Kwon said. Loans to households rose for a fourth month in May and borrowing by companies climbed for a fifth month, a June 10 report showed.

“The central bank will have to control inflationary expectations, which already seem to be rising, in order to achieve sustainable growth,” he said, saying the inflation rate will accelerate to 3 percent toward the end of the year as costs for commodities gain and demand strengthens.

Consumer prices rose 2 percent in June from a year earlier, the slowest pace in almost two years.

To complement interest-rate cuts, South Korea’s government has allocated more than 67 trillion won ($53 billion) won in stimulus measures over the past year. Its most recent 17 trillion-won package of handouts, low interest-rate loans and infrastructure spending was approved by parliament in April.

“The Korean economy isn’t likely to collapse unless there are Korea-specific downside risks, which I don’t see,” Kwon said.

To contact the reporters on this story: Seyoon Kim in Seoul at skim7@bloomberg.net

Last Updated: July 5, 2009 21:02 EDT