It was the first such rate cut in the repo rate by the Bank of Korea in seven months. The export-driven economy of South Korea, Asia's fourth largest, has seen exports affected by the declining Japanese yen. A lower yen makes Japanese exports cheaper in markets where the two countries compete.
In announcing the rate cut on its website, the bank's monetary policy committee said sluggishness of economic activities in the eurozone has deepened. It said trends of improvement in economic indicators in emerging market countries such as China have been weaker than initially anticipated with the result that some central banks, including the European Central Bank, have cut rates.
The committee said it expects the global economy to continue its modest recovery but that "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 bank said South Korea's exports have maintained their recovery trend, although at a modest pace. However, economic growth has remained weak, with "indicators related to domestic demand alternating between improvement and worsening."
The committee said 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 inflation is expected to remain low.
The government of recently elected President Park Geun-hye, which has cut its growth forecast for this year to 2.3 percent from 3 percent, has been pressing the BOK to support its stimulus policies to spur growth. South Korea's economy grew 2 percent in 2012, which was a 3-year low.
The bank's rate cut follows similar actions by central banks of some other countries.
"Global central banks are rushing to take an easing policy stance to spur the growth, giving the BOK the reason to follow suit due to increased external economic risks," Lim Noh-jung, economist at I'M Investment & Securities Co., told Yonhap News. "Consumer spending and exports still remain weak, necessitating the central bank's action."
In other developments, the South Korean Parliament approved the government's proposed bill on an extra budget of $15.9 billion, which should allow for more economic stimulus.
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