SEOUL (Bloomberg) -- South Korea's economy grew at the fastest pace in 18 months and its credit rating was increased by Moody's Investors Service, driving the won and stocks higher.

Asia's third-largest economy expanded 1.7 percent in the three months to June 30 from the first quarter, the Bank of Korea said in Seoul on Wednesday. South Korea's long-term foreign and local currency credit ratings were boosted to A2, the first increase in five years. The won climbed to the highest since 1997 on speculation faster growth will prompt the central bank to increase interest rates a second time this year. Exports grew at almost double the pace of the first quarter on higher sales of LG Electronics Inc. mobile phones and Samsung Heavy Industries Co. ships. “The strong economic data coming out of Korea in recent weeks, together with the Moody's upgrade of the credit rating, are very positive,” said David Cohen, director of Asian economic forecasting at Action Economics in Singapore. “It's more likely that we'll see another rate hike this year.” The benchmark Kospi stock index rose 0.6 percent after the upgrade, reversing an earlier decline. It has now gained 40 percent this year. The growth in gross domestic product was more than the 1.3 percent median estimate of 11 economists in a Bloomberg News survey. ---------Won rises “Korea's favorable macroeconomic performance will likely continue over the near term,” Moody's Senior Vice President Thomas Byrne said in a statement. The ratings upgrade to the sixth-highest investment grade puts South Korea on par with China, Hungary and Israel. Moody's said the outlook on the ratings is stable. The won rose to 913.35 per dollar in Seoul, from 914.10 at last night's close. The currency earlier touched 913.00, matching the level reached Dec. 7 that was the highest since October 1997. The yield on the three-year bond fell 4 basis points to 5.36 percent. “Third-quarter growth may not be as high as the second quarter's 1.7 percent expansion,” said Lee Kwang June, director general at the central bank's economic statistics department. The central bank raised its benchmark interest rate to a six-year high of 4.75 percent on July 12, after three increases in 2006. Bank of Korea Governor Lee Seong Tae has said record lending by banks to small businesses may fuel bubbles in the stock and property markets, undermining the longest economic expansion in a decade. ---------------Longest in decade Growth in the three months ended June 30 marked a 17th consecutive quarter of expansion, the longest since 1996. From a year earlier, South Korea's growth was 4.9 percent. Japan's economy is expected to grow 0.2 percent in the second quarter from the first, according to economists. Loans to small businesses soared to a record last quarter as lenders sought new customers to overcome tighter rules for mortgages. Governor Lee says finance companies have a “herd mentality” that's fueling the supply of money and poses an inflation risk. Nationwide home prices rose 9.3 percent in June from last year, according to Kookmin Bank. That compares with a 9.7 percent increase in May and a 10.8 percent gain in April. To rein in accelerating debt growth, the government required stricter screening of borrowers and curbs on the number of loans a person can take out. The central bank ordered lenders to hold more money as reserves. Exports rose 5.2 percent in the second quarter, nearly double the 2.7 percent first-quarter gain. Overseas shipments account for about 40 percent of the $887 billion economy. ----------Chips, oil tankers Samsung Heavy Industries Co., the world's second-largest shipyard, said on Tuesday profit in the second quarter more than quadrupled as the company built more gas and oil tankers. LG Electronics Inc., Asia's second-largest maker of mobile phones, reported its highest profit in three years last quarter. Manufacturing climbed 3.6 percent in the second quarter from the first, when it fell 0.9 percent. Imports accelerated to 6.7 percent from 4.5 percent. Business spending rose 3.5 percent. Posco, Asia's third-biggest steelmaker, said last week it will spend 1.79 trillion won ($2 billion) to boost steel production to meet demand from shipbuilders. “We expect the strengthening global industrial cycle to support stronger export growth for the remainder of the year, which will feed into a steeper recovery path in capital expenditure and in turn bolster the labor market,” Mark Tan, an economist at Goldman Sachs Group Inc. said in a note. “This will set the stage for stronger consumption.” ----------Consumer spending Private consumption growth slowed to 0.8 percent in the second quarter from 1.5 percent in the first. Construction investment declined 1.4 percent. “Private consumption didn't rebound as households grapple with record-high indebtedness,” said Frederic Neumann, an economist at HSBC Holdings Plc in Hong Kong. Household debt surged 41 trillion won last year, the biggest annual increase since 2002, according to the central bank. Government reports indicate that the expansion will continue. In June, consumers became the most confident in 15 months, the jobless rate dropped and department store sales increased at the fastest pace in four months