The Bank of Korea on Thursday lowered the benchmark interest rate for the first time in three-and-a-half years by a quarter percentage point to 3 percent.
BOK Governor Kim Choong-soo told reporters the decision came as a "preemptive measure amid increasing downward pressure on the economy."
In the wake of the financial crisis erupted in 2008, the central bank kept cutting interest from 5.25 percent to 2 percent until February 2009, but either increased or froze it since.
Lower interest could increase household loans and aggravate the debt problem. The BOK predicted household loans would increase by around 0.5 percent due to the latest cut. That means the staggering amount of household debts, which totaled W910 trillion at the end of March this year, would rise by another W4.5 trillion (US$1=W1,152). It could make it tougher to control consumer prices.
The bank's decision to lower the key interest rate despite the risks underscores the bigger uncertainties that face the Korean economy.