South Korea's central bank left the key interest rate unchanged on Friday in a bid to gauge the effect of a surprise rate hike made last month despite concerns about inflation.
Bank of Korea (BOK) Gov. Kim Choong-soo and his fellow policymakers froze the benchmark seven-day repo rate, dubbed the base rate, at 2.75 percent.
Last month, the BOK unexpectedly hiked the borrowing costs by a quarter percentage point, the third increase since the onset of the global financial turmoil, in a bid to tame growing inflationary pressure.
The decision is in line with a median forecast by 11 economists out of 19 financial institutions in a survey by Yonhap Infomax, the financial news arm of Yonhap News Agency.
Experts said the rate freeze came as the BOK might want to see the effect of the January rate increase, and the current spike in consumer prices is mainly driven by the supply side, which indicates the impact of a rate hike might have a limitation in taming inflation.
"For now, the cost-push inflationary pressure seems to outweigh the demand-pull one. And given that a rate hike has far-reaching impacts on the economy, a back-to-back rate increase seems to be burdensome," said Kim Dong-hwan, a fixed-income analyst at HI Investment & Securities Co.
Analysts also noted that growing household debt and the still sluggish housing market might have prevented BOK policymakers from raising the rate for the second straight month.
Although the BOK took a pause this month, South Korea is facing growing inflation risks like other emerging countries. Relatively strong economic growth and rising oil and grain prices, sparked by the loose monetary stance of the U.S., are putting upward pressure on Korea's inflation. China's central bank raised the benchmark rate on Tuesday evening, the third rate increase in four months to contain price pressure.
South Korea's consumer prices shot up 4.1 percent in January from a year earlier as a prolonged cold spell, outbreaks of foot-and-mouth disease and higher oil costs added to inflation pressure. The January growth surpassed the upper ceiling of the BOK's 2-4 percent inflation target band.
President Lee Myung-bak has declared a "war" on inflation. The government unveiled a set of anti-inflationary measures last month, including a freeze in public utility charges.
The government is seeking to contain consumer inflation at around 3 percent this year while targeting 5 percent economic growth. The BOK put its 2011 inflation projection at 3.5 percent.
The South Korean economy remains on a solid growth track, aided by robust exports and improving domestic demand. Despite China's shift into a tight bias, South Korea's exports grew 46 percent to a record US$44.9 billion in January.
Analysts said the BOK is widely expected to resume its tightening move in March and it will continue to raise the borrowing costs in a gradual manner.
"In the first half, the BOK is expected to raise the rate twice to 3.25 percent in a bid to put a lid on rising inflation expectations," said Oh Chang-sub, an economist at IBK Securities Co.
The BOK has hiked the key rate since July last year from a record low of 2 percent in a bid to normalize its accommodative monetary stance. (Yonhap News)