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 on Thursday, marking the first rate cut by the central bank since May last year.
The bank cited sluggish domestic demand brought on by the ferry disaster in April and sagging business and consumer sentiment as reasons for the move.
BOK 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."
Though concerns linger that a rate cut could result in more household debt, which already stands at around 980-billion U.S. dollars, the governor said the debt level is manageable, for now.
He added the focus should be on how fast the debt level is growing compared to that of income, not the total amount.
And that's why the market expects further rate cuts down the road.
"If this rate cut does not boost the consumption, we'll likely get another rate cut from the BOK. And we think that another rate cut will likely come by the end of this year."
This month's rate cut was widely expected as the bank was under pressure to go hand in hand with the government that unveiled a set of aggressive stimulus measures last month.
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.