2nd LD Writethru: S.Korea cuts policy rate to all-time low of 1.75 pct

South Korea's central bank on Thursday cut its benchmark interest rate by 25 basis points to an all-time low of 1.75 percent.

It was the first time that the country's policy rate fell below 2 percent. Bank of Korea (BOK) lowered the seven-day repurchase rate by 25 basis points each in August and October last year to a record low of 2 percent.

The 2-percent interest rate was maintained about one and a half year from February 2009 when the 2008 global financial crisis hit the global economy, including South Korea.

The unexpected rate cut came after economic indicators for January and February bolstered worries about the South Korean economy falling into deflation, or economic slowdown and falling consumer prices.

The country's consumer price inflation was 0.5 percent in February from a year earlier, staying below 1 percent for three months in a row. It actually posted a negative number as tobacco price hike raised the headline inflation by 0.58 percentage points last month.

Adding to concerns, production in all industries reduced 1.7 percent in January from a month earlier, marking the biggest monthly slide since March 2013, and retail sales dipped 3.1 percent in January. Exports, which account for about half of the economy, declined 3.4 percent in February from a year ago.

Pressures on the BOK to lower rates further increased following the downbeat data. Kim Moo-sung, chief of the ruling Saenuri Party, said on March 4 that the current situation should be taken seriously as it is in an early stage of deflation, noting that many experts are putting forward the need for rate cuts.

Finance Minister Choi Kyung-hwan said on the same day that he " has much worry about deflation" caused by the prolonged low headline inflation though he said the economy had yet to slip into deflation.

The prolonged disinflation tends to delay consumption expenditure on expectations that consumer prices may fall further. It would result in a stagnant economy, especially in the domestic market, possibly leading to deflation, or the vicious circle of consumer price fall and economic slowdown. Endit