Bank of Korea (BOK) Governor Rhee Chang-yong and other monetary policymakers decided to leave the benchmark seven-day repurchase rate unchanged at 3.50 percent.
The decision was not made unanimously as one policymaker cast a dissenting vote to claim a rate hike.
It was in line with market expectations. According to the Korea Financial Investment Association's poll of 100 fixed-income experts, a total of 66 percent predicted the rate freeze this month.
The BOK had delivered seven back-to-back rate hikes between August 2021 and January 2023, raising its policy rate by 3.0 percentage points from a record low of 0.50 percent.
The BOK said in a statement that the monetary policy board deemed it warranted to judge whether the policy rate needs to rise further while maintaining the restrictive policy stance for a considerable time with an emphasis placed on ensuring price stability.
Expectations remained high for the BOK to hike rates further amid the still high inflation and the wider gap between the South Korean and the U.S. interest rates.
The country's consumer prices rose 5.2 percent in January from a year earlier, staying above 5 percent for the ninth consecutive month.
The BOK had been under pressure to quell the high headline inflation, which far exceeded the central banks' mid-term inflation target of 2 percent.
Inflation expectations, which measure the outlook among consumers over headline inflation for the next 12 months, stood at 4.0 percent in February, up 0.1 percentage point from the previous month.
The BOK said it was forecast that inflation will continue to be above the target level throughout the year although it was projected to gradually decrease.
The U.S. Federal Reserve's fast rate hikes put the BOK on alert as the belated response may force foreign funds out of the South Korean financial market and cut the value of the domestic currency versus the U.S. dollar.
The depreciation of the local currency would increase energy import costs, putting additional inflationary pressures on the South Korean economy.
The Fed lifted its target range for the federal funds rate by 0.25 percentage points to 4.50-4.75 percent earlier this month, widening the gap with South Korea's policy rate.
Expectations ran high for the Fed to tighten its monetary policy stance further later this year to rein in inflation.
New York Fed President John Williams said earlier this month that the Fed's forecast of a peak short-term rate of 5 percent to 5.25 percent was reasonable, noting that the Fed needed to maintain "restrictive" interest rates for a few years to curb inflation.
The BOK said the Fed's terminal rate would be higher than previously expected after the announcement of U.S. labor market and price indicators exceeding market expectations.
Concerns deepened over an economic downturn on the back of weaker global demand and high interest rates.
The BOK said the domestic economic growth was expected to remain weak, affected by the global economic slump and the increase in interest rates.
South Korea's export dropped 16.6 percent in January from a year earlier, continuing to fall for the fourth successive month.
Real gross domestic product (GDP), adjusted for inflation, shrank 0.4 percent during the October-December quarter in 2022 compared to the previous quarter, marking the first reduction in two and a half years.
Higher borrowing costs would expand the debt-servicing burden for households, which have suffered from massive debts.
Bank loans to households dwindled last year on higher lending rates, but it stayed near the record-high level owing to the home purchase with borrowed money.
The increased debt-servicing burden was expected to weigh down on private consumption, while high inflation may lessen real income for households.
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