The Bank of Korea cut its base rate by 25 basis points to a record low of 1.25%, adding to a list of global central banks that have recently eased their monetary policy due to growth concerns.
Annual consumer price inflation slowed to 0.4% in September due to weaker prices of oil and agricultural products, government data showed earlier this month. Inflation is projected to fall short of the bank's July estimates and "fluctuate for some time at around the 0% level" before running toward the 1% range in 2020.
Rate-setters had predicted in July that 2019 headline inflation would reach 0.7%, below the central bank's 2% target.
The rate of domestic economic expansion remained slow due to weak consumption growth and a continued sluggishness in exports on the back of the U.S.-China trade rift, the central bank noted. It warned that this muted economic growth is likely to persist and miss the forecast in July, when it projected that GDP would grow 2.2% this year.
Given this economic backdrop, the central bank said it will assess whether to adjust the degree of monetary policy accommodation.
The central bank is expected to ease further next year as growth weakness is likely to continue over the coming quarters, said Alex Holmes, Asia economist at Capital Economics. He expects South Korea's diplomatic spat with Japan and trade tensions between the U.S. and China to linger.
"Further rate cuts should also guard against the threat of a prolonged period of damaging deflation," Holmes added.