Expectations are rising that the South Korean government will take follow-up measures in the wake of Friday's much-anticipated cut in interest rates by the Bank of Korea.

The BOK’s move, marking the first pivot in 38 months, came as the country’s inflation is moderating but domestic demand is still mired in a protracted slump.

As expected, the central bank slashed the benchmark rate by 25 basis points to 3.35 percent, the first interest rate cut since August 2021, reflecting the latest economic trends, including a 1.6 percent drop in inflation in September.

The BOK said in a statement that Korea’s inflation is showing signs of stabilization, household debt growth is beginning to slow after the government’s tightening policy, and the risk linked to foreign exchange markets is easing.

The US Federal Reserve also trimmed its key rate by a half percentage point last month, setting an example that the central bank here could follow with more conviction.

The latest economic figures also supported the need for a turnaround in monetary policy. Consumer prices jumped 2.6 percent on-year in July, but slowed to 2 percent in August and 1.6 percent in September. For two months in a row, in other words, inflation has been within the mid-term target of the BOK.

But there have been warning signs in recent months. Korea’s private consumption, facility investment and construction investment weakened, illustrating the depth of problems with the prolonged slump in domestic demand. As a result, not only the state-run think tank Korea Development Institute but also the Organization for Economic Cooperation and Development revised down their growth forecast for the Korean economy.

But the central bank opted for a rate cut of 25 basis points rather than the deeper 50 basis points that would have affected the markets more dramatically. The reason was explained at a press briefing after the rate cut decision was made on Friday. “Most board members agree on the need to monitor the impact of this month's rate cut on financial stability, especially home prices and household debt,” Rhee Chang-yong said.

Indeed, the country’s property prices and household debt are the two major headaches for policymakers, especially because they are closely interrelated with each other, and the country’s entire economy could face a severe setback if these two worrisome factors somehow spin out of control.

All in all, the BOK sent a strong signal to the government that the central bank has done its part by shifting its monetary policy to help support a recovery in domestic demand.

Now it's time for the government to play its part. It has to minimize potential risks in connection with the property market and household debt, and implement measures aimed at injecting fresh energy into domestic demand.

Early this month, the government unveiled a set of policy plans designed to revitalize the local economy. The new plans include a change that will grant extended management rights to project operators as part of regulatory reform initiatives. The government forecasts that its plans will generate new investment valued at some 30 trillion won ($21 billion) over the next five years.

Aside from big plans, the government is required to examine risk factors in the real estate market, which could quickly overheat with an inflow of speculative investment money in consideration of lower interest rates. Financial authorities must rigorously monitor and manage household debt, another risk factor that can neutralize the positive effect of the rate cut.

Some companies and business people claim that the rate cut of 25 basis points is far from sufficient to bring about tangible changes in the slump-laden domestic market. For a bigger cut to further support a recovery, the government, financial authorities and market players must work together to address lingering concerns about the property market household debt.