South Korea's central bank Thursday kept its key interest rate unchanged despite strong inflationary pressure, saying growing eurozone debt problems could threaten the economy.
The Bank of Korea, in a unanimous and widely expected decision, froze its policy rate for July at 3.25 percent following a 25 basis points increase in June to curb rising prices.
The bank said in a statement it expects consumer prices to remain on a "strong upward trend" due to higher fresh food prices and demand-side pressures.
"There is also a possibility of an uptrend in core inflation persisting for the time being," it said. Core inflation excludes volatile food and energy prices.
The BoK said Asia's fourth largest economy appears on track for solid growth in coming months thanks mostly to strong exports.
But it cited major downside risks, including rising sovereign debt problems in the eurozone and a slowdown in the ecovery in major countries such as the United States.
"The eurozone debt crisis will have a limited impact on the Korean economy, but if the problems get serious, they could have a considerable effect on Korea indirectly as a large part of foreign capital comes from Europe," said central bank governor Kim Choong-Soo.
South Korea's growing household debt was another factor in the rate freeze, he told a news conference. The debt has surpassed 800 trillion won ($748.8 billion).
But inflation pressure remains persistent, with the consumer price index rising 4.4 percent in June from a year earlier. It was the sixth straight month it has topped the government's targeted maximum of four percent for this year.
Barclays Capital economist Wai Ho Leong told Dow Jones Newswires the next rate rise could come as early as August.
Leong tipped two more increases this year to take the rate to 3.75 percent by December as the central bank tries to curb inflation.
Capital Economics also forecast an increase in August or September and a 3.75 percent rate by year-end. But it said the tightening cycle would end early next year if oil and other commodity prices keep falling.
New Finance Minister Bahk Jae-Wan vowed this month to try harder to combat inflation, acknowledging that many Koreans do not feel better off despite strong economic growth.