Roundup: 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 as economic indicators, announced in the past two months, led to worry about the prolonged weakness in domestic demand that could damage growth potential in the long run.

Bank of Korea (BOK) Governor Lee Ju-yeol and six other policy board members decided to make the benchmark seven-day repurchase rate fall below 2 percent for the first time in the country's history.

Two members opposed to the decision in favor of rate freeze.

The BOK lowered the rate by a quarter percentage point in August and October each last year. The 2-percent 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.

"Recovery in domestic demand was far weaker than thought. If this situation continues for an extended period of time, growth potential could be undermined. The rate cut came to prevent such situation," Lee told a press conference after the rate-setting decision.

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.

Fears that "currency war" may have kicked off in the global economy placed more pressures on the BOK to lower the record-low rate further. Lee said last month that the country's exports to Japan and Europe reduced as the South Korean currency strengthened against the Japanese and European peers.

Japan is believed to have opened a door for global currency war by taking a policy of the so-called "Abenomics," or money printing advocated by Japanese Prime Minister Shinzo Abe to emerge from its protracted deflation.

The European Central Bank (ECB) launched its quantitative easing, or bond-purchase program, from this week to provide money for banks in the region, joining the global battle to devalue currencies.

Among concerns about the BOK's rate-cut decision was the earlier-than-expected rate hike by the U.S. Federal Reserve. Employers in the United States added 295,000 jobs in February, beating market consensus of about 240,000 jobs added. The jobless rate declined to 5.5 percent, marking the lowest in about seven years.

The stronger U.S. labor market triggered expectations that the U.S. Fed may raise interest rates as early as in June after having kept the policy rate between zero and 0.25 percent since 2008.

The opposite movement of South Korea's monetary policy to that of the U.S. central bank may trigger an abrupt exodus of foreign capital from the South Korean financial market, prompting the local foreign exchange market to get out of control.

Another uncertainty facing the BOK is South Korea's massive household debts that are keeping a record-breaking trend. Further rate cuts may speed up the debt-driven bubble in assets, especially in real estate as seen in the U.S. Endi