The Bank of Korea on Friday decided to keep the benchmark interest rate unchanged at 3.25 percent for the 12th straight month.
Some analysts felt a rate increase was a real possibility, especially since China unexpectedly cut rates for the first times in four years a day earlier.
But inflation remains well within the central bank's target range, and GDP continues to show acceptable growth, so most other forecasters were expecting no change.
"The committee anticipates that the domestic economy will gradually post long-term trend level growth going forward, but recognizes the situation to be one in which downside risks to growth are becoming larger due mostly to the increase in external risk factors," the bank said in a statement accompanying the decision.
CPI held steady at 2.5 percent on year in May, unchanged from the 20-month low reading in April. Inflation continues to reside near the lower end of the central bank's target range of 2 to 4 percent. On a monthly basis, inflation was up 0.2 percent after April's flat reading.
Core CPI, which strips out the volatile costs of food, was up 1.6 percent on year and 0.2 percent on month.
"Consumer price inflation sustained a level in the mid-2 percent range in May, and core inflation dropped compared to the previous month," the bank said. "The committee does however recognize the presence of potentially destabilizing factors, such as pressures to hike public utility fees and the ongoing high inflation expectations."
In addition, sound economic growth continues to show expansion.
South Korea's gross domestic product climbed 0.9 percent in the first quarter of 2012 compared to the previous three months following the 0.3 percent gain in the previous three months. On a yearly basis, GDP was up 2.8 percent following the 3.3 percent increase in the fourth quarter of 2011.
"The committee appraises the trend of economic growth, although weak, to be continuing, with consumption and facilities investment having shifted to slight increases while exports generally maintain their levels of last year," the bank said. "On the employment front, the uptrend in the number of persons employed is being sustained, led by the private sector."
The central bank had unexpectedly hiked interest rates by 25 basis points at its June 2011 meeting and left the policy unchanged since then.
"Looking ahead, the committee, while closely monitoring external risk factors and the consequent changes in domestic financial and economic conditions, and endeavoring to lower inflation expectations, will conduct monetary policy so as to stabilize consumer price inflation at the midpoint of the inflation target over a medium-term horizon amid continuing sound growth of the economy," the bank said.
by RTT Staff Writer
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