The Bank of Korea (BOK) left its benchmark interest rate unchanged at 3.25 percent on Thursday, keeping its rate freeze stance for 11 straight months due to conflicting factors such as lingering downside risks to the economy and the concerns over inflationary pressure.

Governor Kim Choong-soo and monetary policy board members decided to freeze the 7-day repo rate at 3.25 percent at the May rate-setting meeting. The BOK has lifted the borrowing costs by a total of 125 basis points (bps) in five steps since July 2010.

The decision was in line with market expectations as experts predicted that the BOK will not move the policy rate because of lingering risks to the economy such as political uncertainties in Europe and worsening economic data at home and abroad as well as the remaining concerns over supply-side inflationary pressure.

Downside risks to the Asia's No.4 economy lingered due to uncertainties at home and abroad. South Korean economy created more than 400,000 jobs in March, but output in the mining and manufacturing sectors shrank 3.1 percent in March from a month earlier.

Production in the service industry declined 1 percent on-month in March, and retail sales contracted 2.7 percent over the same period. Exports, which account for more than half of the South Korean economy, reduced 4.7 percent on-year in April.

Adding to concerns, external uncertainties resurfaced recently. The U.S. economy created 115,000 jobs in April, much lower than the market expectations of 168,000 jobs. The Institute for Supply Management (ISM) factory index, measuring the U.S. manufacturing activities, unexpectedly climbed to 54.8 in April, the highest in 10 months, but the non-manufacturing purchasing managers' index declined to 53.5 in April from 56.0 in March.

France's Socialist candidate Francois Hollande, who was against the austerity plan, beat the current president Nicolas Sarkozy in the presidential election, underlying the growing political uncertainties in the European countries. Greece's two main parties suffered huge defeat in a general election, while those opposed to more fiscal cuts won almost 60 percent support in the election. The newly elected Greek politicians appeared unable to form a coalition government, boosting concerns that the country may fail to stick to its austerity plans.

South Korea's consumer prices rose 2.5 percent in April from a year earlier, down from a 2.6 percent on-year gain in the previous month and below the upper ceiling of the BOK's inflation target band of 2-4 percent for four straight months.

Despite the easing headline inflation, worries about the supply-side inflationary pressures remained amid high oil prices. Dubai crude, South Korea's benchmark, averaged 118 U.S. dollars a barrel last month, posting the 15 straight months of prices staying above the 100 dollars per barrel.

"Geopolitical unrest in Iran and global cash inflow into the commodity markets are expected to continue to add cost-push inflationary pressures to the headline consumer price inflation throughout 2011," said Shin Chang-mok, a senior research fellow at Samsung Economic Research Institute.

The fall in statistical figure for the headline inflation was mainly attributed to policy effect. The South Korean government widened its financial support for child care service, preschool tuition and outlays for using childcare facilities, while broadening its free school meal program. Those measures pulled down prices for private services.

Inflation expectations remained high. South Korean consumers' expectation for inflation over the next 12 months came in at an annual rate of 3.8 percent in April. The figure was slightly down 0.1 percentage point from the previous month, but stayed at a high level.