The Bank of Korea's monetary policy board on Thursday elected to trim the nation's benchmark interest rate by 25 basis points, from 2.75 percent to 2.50 percent after six months of holding steady.
The decision was something of a surprise, although inflation has now dipped low enough to allow the bank some maneuvering room to counter soft economic data.
The central bank also expects CPI to remain low for the time being, and the board members believe that downside risks remain for the global economy.
"The committee expects the global economy to continue its modest recovery going forward, but judges that the downside risks to growth remain considerable due chiefly to uncertainties related for instance to the sluggishness of economic activity in the euro area and to the implementations of fiscal consolidation in major countries," the central bank said in a statement accompanying the decision.
Consumer prices in South Korea were up 1.2 percent on year in April, easing from 1.3 percent in March and 1.4 percent in February.
Inflation remained beneath the central bank's target range of 1.5 to 3.5 percent, which it had lowered this year from 2 to 4 percent in 2012.
Now at a 32-month low, inflation has remained below 2 percent since last November, giving room for the central bank to ease monetary policy.
Consumer prices eased 0.1 percent on month in April after rising 0.2 percent in March and 0.3 percent in February.
Core inflation, which excludes volatile food and oil prices, moved up 1.4 percent after adding 1.5 percent in March and 1.3 percent in February. It was flat on month.
"The committee forecasts that inflation will remain low for the time being, provided there are no occurrences of exceptional factors on the supply side," the bank said. "As for housing prices, the downtrend of those in Seoul and its surrounding areas slowed as transactions increased, and those in the rest of the country continued on their moderate uptrend."
The central bank was able to lower rates in order to combat some soft economic data.
South Korea's exports grew at a weaker-than-expected pace in April, suggesting that the continued weakness in yen, stemming from announcement of massive stimulus by Bank of Japan, has started to affect the country's overseas trade.
Exports rose 0.4 percent year-on-year in April to $46.29 billion, missing forecasts for a 2 percent increase. Imports fell 0.5 percent year-on-year to $43.71 billion compared with 1.2 percent decline forecast. The trade surplus narrowed to $2.58 billion from $3.28 billion in March.
South Korea's industrial production declined for a third consecutive month in March, dipping a seasonally adjusted 2.6 percent from February, when output was down 0.9 percent. On an annual basis, production fell 3 percent compared with expectations for 0.7 percent fall.
"Going forward there is no change to the committee's forecast that the domestic economy will show a negative output gap for a considerable time, due mostly to the slow recovery of the global economy, to the influence of Japanese yen weakening, and to the geopolitical risk in Korea," the bank said.
The central bank had trimmed the rate by 25 basis points in October before holding it steady in the intervening meetings.
The BoK had surprised analysts eight months ago with a 25-basis point cut after 12 straight meetings with no change.
"Looking ahead, the committee will closely monitor the effects of the base rate cut and the economic policies of the government including the supplementary budget, strive to improve the sentiments of economic agents and lower inflation expectations, and conduct monetary policy so as to keep consumer price inflation within the inflation target range over a medium-term horizon while ensuring that the growth potential is not eroded due to the continuation of slow growth," the bank said.
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