The Bank of Korea (BOK) left its benchmark interest rate unchanged at 3.25 percent on Friday, keeping its rate freeze stance for a seventh straight month, due to lingering uncertainties at home and abroad.

Governor Kim Choong-soo and monetary policy board members decided to freeze the 7-day repo rate at 3.25 percent for the first monetary policy meeting of this year after raising the rate by 25 basis points (bps) in January, March and June last year. The BOK has lifted the borrowing costs by a total of 125 bps in five steps since July 2010.

Governor Kim told reporters after the rate-setting meeting that downside risks to the global economy became bigger, indicating his monetary policy stance turned dovish.

"Downside risks to the global economy became bigger. This means that the European economy will not be in a better shape, albeit not in a worse state. The U.S. economy will not recover at a fast pace, albeit not into mild recession. If we revise our economic forecast for 2012, the revision would be downgraded rather than upgraded," said Kim.

The BOK said in a statement after the policy meeting that the country's economic growth would stay at a moderate level for the time being due to external risk factors before recovering gradually to its long-term growth trend, stressing that the global economy was expected to recover at a significantly moderate pace.

The decision was in line with market expectations as experts predicted the freeze due to remaining uncertainties at home and abroad. "South Korea's economic growth has continued to slow owing to the deterioration in domestic demand, as a result of the lingering volatility in the stock and FX markets amid worries about European debt crisis," DBS, Southeast Asia's largest lender, said in a report before the rate decision.

UNCERTAINTIES

South Korea's economic growth slowed moderately. "Our economy saw employment maintain its recovery trend, but some economic indicators were somewhat weakening," the Ministry of Strategy and Finance said in a so-called Green Book, a monthly report assessing the nation's economic conditions.

According to the latest economic data, the country's industrial output and private consumption weakened amid the lingering external uncertainties. Production in the manufacturing and mining sectors contracted 0.4 percent in November from a month earlier, and retail sales shrank 0.6 percent over the cited period.

Exports, which account for more than half of the Asia's No.4 economy, have remained solid, and the labor market indicated that the economy may continue to create jobs despite external uncertainties such as the European fiscal crisis.

The seasonally adjusted unemployment rate was unchanged at 3.1 percent for the third consecutive month in December. "The all-time low in the unemployment rate is 3 percent so the economy is close to full-employment. However, the BOK fears eurozone contagion. We are part of the unanimous consensus forecasting it will remain on hold," said Tim Condon, head of Asia research at ING in Singapore.

On the international front, fresh uncertainties emerged. The government bond yields of European nations such as Italy, Spain and Hungary continued to rise, and fears over the possible credit rating downgrade of France were lingering. "Concerns about Europe' s finances are re-emerging. France is on the verge of losing its top-notch credit rating. The 10-year Italian bond yield is hovering above 7 percent," said Yoo Yeo-sam, a fixed-income analyst at Daewoo Securities.

Despite the announcement of high-than-expected U.S. payroll data, the 10-year U.S. Treasury yield remained below 2 percent, indicating that the recent flow of positive economic indicators in the U.S. would soon come to an end. Market watchers expected the January data to signal the weakening of the U.S. economy.

INFLATION

Despite the weak economic picture at home and abroad, the odds of the BOK turning to easier monetary policy were slim due to fears over inflation. South Korea's consumer prices advanced 4.2 percent in December from a year earlier, rising above the upper ceiling of the BOK's inflation target band 2-4 percent.

For the whole of 2011, the consumer price inflation reached 4 percent, the highest in three years. On a monthly basis, the consumer price inflation breached the 4 percent level six times last year. "With inflation staying stubbornly higher than the central bank's target of 2-4 percent, the room of relaxing monetary policy to support economic growth is constrained," DBS said.

South Korean President Lee Myung-bak showed his determination in controlling consumer prices, setting price stability at the center of state management for 2012. President Lee said in a nationally televised New Year address that he will focus on bringing consumer prices down, promising to curb inflation within the low 3 percent range this year. Finance Minister Bahk Jae-wan also said the government's top priority for this year will be placed at easing inflation.

Supply-side inflationary pressures were feared to strengthen due to geopolitical risks in the Middle East. The escalating confrontation between Tehran and Washington over the former's nuclear ambitions drove up global oil prices. "Increasing geopolitical risks stemming from the recent international community's stronger sanctions against Iran have led to the possibility of a surge in oil prices," said Peter Par, a fixed- income analyst at Woori Investment & Securities.

Global oil prices were expected to stay at a high level this year. According to the U.S. Energy Information Administration (EIA) , the price of West Texas Intermediate (WTI) crude oil was projected to be about 100 U.S. dollars per barrel in 2012, five dollars per barrel higher than the average price in 2011.

Surging prices for raw materials, including crude oil, would inevitably lead to consumer price inflation as higher commodity prices would drive up producer prices, the gauge of future consumer price inflation. The country's import prices rose 0.2 percent in December from the previous month after falling 1.6 percent in November.