By Cynthia Kim and Dahee Kim


SEOUL (Reuters) - South Korea's economy clocked its fastest growth in seven years last quarter, as global demand for the country's electronics more than offset the impact of regional geopolitical strains on trade and boosted expectations for an imminent interest rate rise.


Gross domestic product rose 1.4 percent in the third quarter from the previous quarter, preliminary numbers from the Bank of Korea showed on Thursday, significantly beating the 0.8 percent forecast in a Reuters survey and marking the biggest jump since a 1.7 percent spike in the second-quarter of 2010. Year-on-year growth accelerated to 3.6 percent in the third quarter from 2.7 percent in the second quarter, also beating forecasts.


The stellar numbers show Asia's fourth largest economy has been able to brush aside the impact of a diplomatic chill between China and South Korea over a U.S. missile defense system and wider concerns about North Korean military provocations.


They have also prompted several analysts to bring forward forecasts for a central bank rate hike.

Kim Doo-un, an economist at Hana Financial Investment, now sees a 25 basis point hike in the bank's next policy meeting in November.

"This kind of robust growth is surely a rate-hike ingredient," Kim said. "Shipments out of semiconductors and IT sector in general have been good, and it also seems exports of services also improved in the third quarter."

The data pushed the won to an eight-week high in early trade on Thursday on the heightened rate hike expectations.

The BOK kept its policy rate unchanged at the record low of 1.25 percent last week but one dissenting policymaker called for a hike, prompting some speculation that a tightening could take place at the central bank's next policy meeting on Nov. 30.

The third quarter numbers are likely to bolster this view with growth now on track to hit the central bank's official forecast of a 3 percent expansion.

"Even if the economy contracts on-quarter, say by about 0.54 percent in the fourth quarter, we can achieve 3 percent expansion this year," Chung Kyu-il, director general for the Economics Statistics Department at the BOK said on the sidelines of a briefing in Seoul.

The central bank said last week that a row with China over Seoul's deployment of a U.S. anti-missile system could knock off 0.4 percentage points off the nation's economic growth this year.

China believes the missile defense system can be used to look inside its territory. An unofficial Chinese boycott against South Korean consumer products and tourism has hurt some segments of Korea's economy though shipments of other products such as memory chips remain very strong.

Exports grew 6.1 percent in the third quarter after declining 2.9 percent a quarter earlier, while private consumption growth slowed to 0.7 percent in the July-September period from 1.0 percent.

Exports, which account for about 40 percent of GDP, notched a ninth consecutive month of double-digit growth in September in value terms, the longest stretch of such expansion since 2001.

"It has been the semiconductors that mainly boosted production from manufacturing sector, but the third quarter also saw some extra boost from overseas sales of cars and petrochemical products," Chung said in a briefing.

The outlook for domestic demand is also improving for the year ahead, with the nation's minimum wage set for its biggest increase in nearly two decades next year.

Construction investment increased 1.5 percent, expanding even after the government's August announcement of tough new housing market rules, which included a hike in capital gains taxes for owners of multiple homes and new curbs on mortgages.

(Reporting by Cynthia Kim; Editing by Sam Holmes)