South Korea's central bank unexpectedly froze the key interest rate Friday for a second month despite inflation pressure, amid continuing economic uncertainty such as the eurozone debt crisis.

Bank of Korea governor Kim Choong-Soo and his fellow policymakers kept the benchmark seven-day repo rate at 3 per cent for May. Twelve of 14 analysts surveyed by Dow Jones Newswires this week had forecast a 25-basis-point rise.

The base rate was increased 25 basis points in March to curb annual inflation, which hit 4.2 per cent in April -- above the central bank's target range of between two and four percent for a fourth straight month.

The bank said it expects consumer prices to keep rising strongly, due mainly to demand-side pressures amid an economic upswing and higher oil prices.

In a statement it reiterated its determination to curb inflation, suggesting monetary tightening in the coming months.

The central bank said the local economy seems on track for solid growth in coming months, helped by robust exports, but risks remain.

"The unstable oil prices and the fiscal problems of certain European countries will act as major downside risk factors," it said.

Hyundai Securities economist Lee Sang-Jae said the pause was likely prompted by greater external risks, with some recent data pointing to sluggish US economic growth and increasingly volatile global raw material prices.

However, "this doesn't mean that it will refrain from the usual baby steps of raising the policy rate with a pause of one or two months."

Lee told Dow Jones Newswires exports remain robust and domestic consumption was improving, while inflation would stay above 4 per cent for some time.

"Chances for a rate hike are all open for June," he said, maintaining his forecast of a 3.75 per cent base rate by year-end.

channelnewsasia.com