The Bank of Korea (BOK), which cut rates by 50 basis points in 2012, said it would continue to lower inflation expectations and keep inflation within the target range while ensuring that the country's growth potential is not eroded due to the continuation of slow growth.
The BOK said Korea's economic growth remains weak with indicators of exports and domestic demand alternating between improving and worsening and the bank expects the negative output gap to persist for a considerable time, mainly due to the slow recovery of the global economy that is chiefly due to the sluggishness of economic activities in the euro area.
South Korea's Gross Domestic Product expanded by only 0.1 percent in the third quarter from the second for annual growth rate of 1.5 percent, down from a rate of 2.3 percent in the second quarter and 2.8 percent in the first quarter.
Headline inflation fell to 1.4 percent in December from 1.6 percent in November and core inflation continued to be at a low level of 1.2 percent.
"The Committee forecasts that inflation will remain low for the time being, owing primarily to the easing of demand-side pressures," the BOK said after a meeting of its monetary policy committee.
The central bank forecasts average 2.7 percent inflation in 2013 and targets inflation of 2.5-3.5 percent for the 2013-2015 period.