(Reuters) - South Korea's central bank kept interest rates on hold on Friday, surprising many economists who had expected a rare back-to-back rate increase as the authorities intensify their campaign to contain inflation.
The central bank's chief hinted not all the board members had voted to hold rates at 2.75 percent, and analysts said his remarks during a news conference indicated a very high chance of an increase next month with more tightening later in the year.
Bond futures rose slightly as traders, who had reduced holdings since a 25 basis point rise in January for fear of aggressive tightening, rushed to cover their short positions, while foreign investors kept on selling out of the country.
"We will promote the policy normalisation at a pace which is neither too fast nor too slow," Bank of Korea Governor Kim Choong-soo told reporters, but repeated last month's existing view that inflation would stay high for the time being.
In contrast to the ultra-loose monetary policy across much of the developed world, central banks in emerging markets have been rushing to tighten policy to contain inflation fuelled by rising commodity and energy prices and strong domestic growth.
China and Indonesia both raised rates this month, while India and Brazil hiked in January.
South Korean President Lee Myung-bak, who until recently focussed policy on boosting growth, declared a "war on inflation" early this year and the government has since been taking various administrative steps to freeze or minimise price increases.
The central bank has delivered two back-to-back rate increases only once before, but a majority of analysts surveyed by Reuters thought mounting evidence of rising price pressures in an expanding economy would compel it to do so again.
The Bank of Korea, however, kept its benchmark 7-day repo rate at 2.75 percent. Analysts now expect the rate to be lifted to 3 percent next month and to 3.5 percent by the end of the year.
Finance Minister Yoon Jeung-hyun dismissed suggestions from some analysts that the government would allow the already rising won to strengthen faster to curb inflation, saying in response to a question on the sidelines of a conference that the won's value should be set by the supply and demand.
The won has gained about 1 percent so far this year against the dollar after a 2.6 percent rise for the whole of last year, but has been underperforming most of the currencies in the country's major export rivals.
INFLATION ABOVE TARGET
The Bank of Korea had been seen as lagging behind the curve in shifting policy towards tightening as Asia's fourth-largest economy pulled out of the 2008-09 financial crisis much ahead of expectations, and started raising rates in July last year.
Out of 21 analysts polled by Reuters, 13 had predicted a rate rise on Friday and eight saw an increase either in March or April.
March-delivery futures on 3-year treasury bonds rose 0.16 point to 102.60 after Governor Kim's news conference, but it follows a persistent sell-off since late last year.
