South Korea’s central bank cut its benchmark interest rate to a record low of 2 percent from 2.25 percent on Wednesday on the grounds of a sluggish global and domestic economy.

The Bank of Korea last lowered the rate from 2.5 percent to 2.25 percent in August. 

“Despite the signs of a global economic recovery, the world economy is faced with several uncertainties including further changes in the Fed’s monetary policy, a prolonged euro-area slowdown, weak growth in the emerging markets and lingering geopolitical risk,” the BOK said in its statement.

The bank added that domestic capital investment was still poor, while business sentiment had yet to get fully back on track despite a steady rise in exports and consumption.

Citing such risks and challenges, the bank cut its economic growth forecast for this year to 3.5 percent from 3.8 percent.

“Upward pressure on prices is not as strong as we expected, and the business sentiment of the major economic players has only slightly improved, meaning there is still a chance of downside risks to the economy.” BOK Gov. Lee Ju-yeol told reporters.

Regarding the rate cut, critics raised concerns about the nation’s snowballing household debt, which is threatening the economic health of individual households, particularly the middle class.

“The potential risk from household debt in the nation is too high, and a further drop in the key rate will increase the risk,” said Song Doo-han, a macroeconomic researcher at Nonghyup Economic Research Institute.

The nation’s household debt reached 1 quadrillion won ($940 billion) last year.

Due to the government’s latest policies to help stimulate the property market ― home-buying transactions appeared to have picked up, with the total number in September the highest since April ― debt has further climbed to reach 540 trillion won last month, up 3.7 trillion won from August.

The BOK earlier said when the key interest rate is lowered by 0.25 percent, household debt increases by 0.24 percent a year.

Doubts linger about the effectiveness of the lower rate as many believe it can no longer function as a tool for boosting the nation’s economic activities such as consumption and investment.

“Due to several factors such as the idle capital reserves at large companies and the paucity of investment opportunities, the benefits from the drop in the key rate will not be so big,” said Yoo Sun-woong, an analyst at LIG investment & Securities.

By Shin Ji-hye (shinjh@heraldcorp.com)