Bank of Korea unexpectedly cuts key interest rate to record low of 1.75 percent

South Korea's central bank unexpectedly lowered its key policy rate on Thursday to a record low of 1.75 percent from 2 percent, joining efforts to fight sluggish domestic spending and aid economic growth.

The quarter of a percentage point cut was the first interest rate cut by the Bank of Korea's policymakers in five months.

The move was unexpected as analysts had predicted that the central bank would stand pat amid concerns that lower rates could accelerate growth in household debt.

Only a handful of analysts forecast that the central bank would lower borrowing rates this month as latest economic data showed weakness in recovery. Exports, South Korea's key growth driver, dropped 3 percent last month from a year earlier. Industrial production slipped 4 percent in January from a month earlier while capital expenditure fell 7 percent in the same month.

The rate cut comes as South Korea's consumer prices gained less than 1 percent for the last three months despite government's efforts to boost consumption and investment in the private sector. Consumer prices edged up just 0.5 percent in February, marking the lowest inflation rate in years.

Earlier this week, South Korea's finance ministry expressed concerns about Asia's fourth-largest economy falling into deflation, citing weak production, consumption, investment and exports. The finance minister pledged to introduce reform measures to encourage spending in the private sector. Some analysts saw the remark as the government giving a green light to the central bank to cut rates.

The central bank lowered the benchmark interest rate two times last year. In January, the central bank revised its 2015 growth outlook to 3.4 percent from 3.9 percent and downgraded its inflation projection to 1.9 percent from 2.4 percent.

The bank will release its revised economic forecasts in April.