The first rate cut of the year comes as part of efforts to stimulate the struggling domestic economy and follows BOK Governor Rhee Chang-yong's remarks last month, when he decided to keep the rate unchanged, that lowering the interest rate "would be an obvious choice."
Since October last year, the BOK has shifted toward monetary easing with multiple rate cuts for the first time since the global financial crisis in the late 2000s, when it lowered rates six consecutive times.
The reversal in rate policies comes amid worsening economic conditions, with last year's GDP growth reaching just 2 percent, below the central bank's projected 2.2 percent. The previous quarter's sluggish 0.1 percent growth rate was a particular concern, as it showed no improvement, seeing a 3.2 percent decline in construction investment.
The central bank also lowered its economic growth outlook for this year to 1.5 percent from 1.9 percent, citing concerns over the U.S.'s harsh tariff offensives under President Donald Trump, who began his non-consecutive second term earlier this year, as well as domestic political instability following President Yoon Suk Yeol's martial law debacle late last year.
The downward revision aligns with other forecasts, as the state-run Korea Development Institute (KDI) recently lowered its growth outlook to 1.6 percent from 2.0 percent, in line with projections from international investment banks.
The weak South Korean won is further signaling a gloomy financial downturn ahead, as it drastically weakened past 1,400 won against the greenback in recent trading, the weakest level since the political turmoil caused by the Dec. 3 martial law declaration.
"If the U.S. keeps its rates steady, the widening interest rate gap between the two countries may cause problems," said Jang Min, a senior researcher at the Korea Institute of Finance, as foreign investors seek higher yields elsewhere, potentially driving up import costs and fueling inflation if the won continues to weaken.
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