Key interest rate frozen at 2.75% for Feb.

Despite concern about rising inflation, South Korea's central bank left the key interest rate unchanged on Friday as domestic and overseas uncertainties are feared to sap the nation's economic recovery.

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 for February, following an unexpected, quarter percentage point increase last month to tame growing inflationary pressure.

The governor cited the eurozone debt crisis and a gain in oil prices, sparked by unrest in Egypt, as downside risks to growth. But he also issued a strong warning against growing inflationary pressure, adding that the BOK will continue its policy normalization at an appropriate pace.

"The country's consumer prices are likely to grow near 4 percent for the time being," Gov. Kim told a press conference after a monthly policy meeting.

Kim said the bank foresees inflation expectations to remain high and upward pressure on inflation to persist as the economy recovers.

"Demand-pull inflationary pressure is on the rise and the run-up in food and oil prices is likely to maintain a strong upward trend."

The rate freeze, which was not unanimous, came as market watchers were sharply divided over whether the BOK would conduct a back-to-back rate hike this month.

Experts said the rate freeze came as the BOK might want to see the effect of the January rate increase and a set of anti-inflation steps unveiled by the government last month. They also said 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.

"The BOK seemed to be burdened by (the prospect of) a back-to-back rate hike. As consumer prices will likely pick up further in February, the central bank is expected to raise the key rate in March," said Oh Suk-tae, a senior economist at SC First Bank.

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.

"The impact of the supply (shock) on inflation could ease down the road. But as inflation expectations are likely to persist, the BOK will closely watch them," Kim noted.

The chief said the BOK will conduct the policy normalization at a pace which is seen as "not too fast, but also not too slow" by taking into account financial and economic conditions at home and abroad.

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 $45 billion in January.

Analysts said the BOK is widely expected to resume its tightening move as early as March and more potential rate hikes are likely to come in the first half rather than the second half.

"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)