The Bank of Korea has joined a government-led campaign to spur growth in the wobbly economy.
It lowered its key interest rate by a quarter of a percentage point to 2.2-5 percent following its monthly monetary policy meeting on Thursday.
It's the first rate cut by the central bank since May last year.
Governor Lee Ju-yeol said the cut is a pre-emptive measure to stop the economy from slowing further, while inflationary pressure is low.
"The rate cut together with the government stimulus measures are expected to improve consumer sentiment and contribute to maintaining growth momentum."
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The central bank's move comes after the government unveiled a set of aggressive stimulus measures last month, including additional fiscal spending of roughly 11-and-a-half billion U.S. dollars.
President Park Geun-hye has also called on economic policymakers to take all possible steps to stop the country from falling into Japan-style stagnation.
But concerns linger that lowering the key rate could result in more household debt which already stands at around 980-billion U.S. dollars.
While the governor admits that the rate cut would have a negative impact on the snowballing debt problem, he says the level is manageable, at least for now.
"It's not the absolute amount of household debt that we have to focus on. It's whether the increased rate of household debt exceeds the increased rate of income."
This month's rate cut was widely expected as Lee recently mentioned that the bank agrees with the government. that the Korean economy is facing challenges.
While pundits have raised questions about the central bank's independence, the BOK chief was clear about its neutrality, saying the bank does not make decisions that stand opposed to their assessments of current economic conditions.
Hwang Ji-hye, Arirang News.