The move by the central bank to slash the key rate to a record-low level could buoy economic growth by getting people and companies to spend more or trigger a liquidity trap if money flows to the property market, observers said Thursday.

The conflicting predictions come after the Bank of Korea (BOK) unexpectedly lowered its base rate to 1.75 percent after recent economic indicators showed Asia's fourth-largest economy struggling with sluggish domestic consumption and weak exports.

Industrial output in manufacturing and mining contracted 3.7 percent on-month in January, the weakest showing since late 2008.

Exports backtracked 3.4 percent on-year last month, while inflation grew just 0.5 percent from the previous year, a telltale sign that people were holding off on spending. There has been speculation that first quarter growth may stop at 0.8 percent, which would cause annual growth to fall into the low 3 percent range.

Observers said that the BOK move could help the country overcome the low growth and low inflation that it is mired in at present by allowing more cash to circulate in the market. Such developments, coupled with the drop in lending rates by commercial banks, could ease the burden on many households that have debt and allow them to spend more.

Finance Minister Choi Kyung-hwan said following a meeting of economy-related ministers in Seoul that the rate cut will be helpful, adding he sees the BOK's decision as having taken into account overall economic conditions facing the country and acting to pre-empt any further problems that could occur.

"The move can energize the weak economic growth momentum and alleviate low inflation worries," the policymaker said. 

Choi and government policymakers have been hinting for months that timely rate cuts can benefit the economy.

Oh Jung-gun, a professor of financial IT at Konkuk University, said lowering the rate can allow people to spend less on interest payments and use the money for spending.

A lower rate could also make it possible for companies to invest, a critical element for growth. Corporate investment in January was down 7.1 percent on-month, despite efforts by the government to encourage businesses to spend more.

On the other hand, detractors say more money can exacerbate household debt that has been cited as one of the main reasons why people are withholding spending. In the worst case scenario, extra cash could flow to the property market that could bring about a liquidity trap. A liquidity trap refers to a situation where monetary policy measures become ineffective because people and firms hold onto cash or pour money into assets that cannot be sold readily for fear of adverse times ahead.

As of last month, commercial banks said household debt reached 566 trillion won ($499.8 billion), up 3.7 trillion won from the month before.

Just after the rate cut was announced, the finance ministry said it will form a special consultative taskforce made up of officials from the BOK, Ministry of Land, Infrastructure and Transport, Financial Services Commission and Financial Services Commission to carefully check changes in debt growth and formulate policy measures that can reduce possible fallouts.

Lee Jun-hyup, a research fellow at Hyundai Research Institute (HRI), said that while lowering the base rate can help, he did not think it will be big enough to make a huge difference.

"The reason why companies are not investing is not because they don't have money but because they do not see a revival in consumption and the economy as a whole," he argued.

Supporting this view, market insiders have said that with the BOK having lowered rates twice last year, there is no lack of liquidity in the market.

Detractors said that while lowering the rate can have a psychological impact, any positive effects won't be felt for at least two quarters.

The HRI researcher warned there is a good chance that the extra money will go to the real estate market and even worsen household debt problems down the line.

Others note that people and companies are closely watching the country's economic growth, which many have said may fall short of expectations this year despite efforts by the government.

Major economic forecasters have recently downgraded South Korea's growth numbers for 2015.

Overseas investment banks, think tanks and credit rating agencies initially expected the drop in crude oil prices to bolster growth, with projections for South Korea at between 3.4 percent and 3.8 percent.

However, according to Bloomberg's latest assessment on data published by 27 international forecasters, South Korea's growth rate average has been adjusted to 3.4 percent this year, on par with the predictions made by the BOK in mid-January.

The number is slightly higher than the 3.3 percent growth reached for 2014, and much lower than the 3.8 percent target set by the finance ministry.

Among predictions, Nomura Securities Co. and Standard & Poor's even argued that depending on future developments in China, U.S. interest rate hikes and fluctuations in foreign exchange rates, South Korea's growth could fall to as low as the mid-2 percent range.

The government still maintains its 3.8 percent growth target, yet insiders admit that they need to keep very close tabs on first quarter data. Poor industrial production, export and consumption could weigh down growth.

Economists also call for monitoring the steady appreciation of the U.S. dollar that can cause an outflow of capital from emerging markets. Such developments can affect the purchasing power of these market, which is not good for a trading nation like South Korea.

In addition, a sudden pullout of money from emerging markets can cause a cascade effect of making it harder to roll over outstanding debt or cause a sudden exodus of foreign funds invested in the country's stock market.

If such developments do occur, it can further upset market confidence and hurt consumer spending.

Policymakers discuss such fears, citing that while the Korean won did depreciate the steepest among Asian currencies coming into March, the country maintains the world's seventh-largest foreign reserve of $362.2 billion and has "manageable" short-term debts to service.

The value of the Korean currency that stood at 1,096 won to the dollar early this month slid around 2.4 percent in about 10 days. (Yonhap)