SOUTH Korea's economy grew at its fastest pace in two years in the first quarter of this year as exports bounced back despite competition from a weak yen. Asia's fourth-largest economy expanded a seasonally-adjusted 0.9 per cent in the January-March period, compared to 0.3 per cent growth in the fourth quarter of 2012, the central Bank of Korea said on Thursday. It was the strongest quarterly expansion since the first quarter of 2011, when the economy grew 1.3 per cent, and is likely to dent expectations of a central bank interest rate later this year. The bank delivered two rate cuts last year -- in July and October -- which brought the base rate to 2.75 per cent. It has since kept the policy rate unchanged. Hit by sluggish export demand from Europe and the United States, the South Korean economy expanded just 2.0 per cent in 2012, its slowest pace for three years. Earlier this month, the central bank revised its economic growth forecast for this year down to 2.6 per cent, just three months after slashing it from 3.2 per cent to 2.8 per cent. Exports account for more than half of South Korea's gross domestic product (GDP), and overseas orders have been been squeezed by a weakening yen, which blunts competitiveness of key exporters such as Hyundai and Samsung. But Thursday's data showed exports rising 3.2 per cent from the fourth quarter of 2012, reversing a 1.1 per cent decline. Last week, the government proposed a 17.3 trillion won ($US15.4 billion / $A15.07 billion) supplementary budget to help boost the economy, including further spending on defence at a time of heightened tensions with the North. The first fiscal stimulus package for four years, which requires parliamentary approval, will cover a 12-trillion won shortfall in revenue and provide 5.3 trillion won in new spending.