The Bank of Korea’s decision to cut the key interest rate for the second time in two months does not assure that it will help the Korean economy overcome all the challenges it faces. But overall, it took a step in the right direction, given the downside risks currently surrounding the economy.

The central bank’s decision to cut the benchmark rate by a quarter of a percentage point to 2 percent, its lowest level, is based on a fair assessment of the economic situation ― the slow recovery of the Korean economy and concerns about the global economic outlook.

Domestically, the government’s massive stimulus measures and the BOK’s last rate cut in August, which ended a 15-month freeze, are not seen to have boosted corporate facility investment and resuscitated consumer sentiment.

Korea’s gross domestic product in the second quarter rose 0.5 percent from the previous quarter, the lowest expansion in seven months. Industrial output in August fell 0.6 percent, the first drop in three months, and facility investment contracted 10.6 percent from the previous month, the lowest mark in 11 years and seven months.

External conditions are not encouraging either. There are growing concerns about the sluggish growth in the euro zone, the weaker yen and the worsening growth outlook for major economies such as China, Germany and the U.S. These are certainly bad signs for Korea’s export-driven economy.

The BOK therefore had ample reasons to downgrade its growth outlook on the same day it lowered the key interest rate to the record-low level ― it trimmed its growth outlook for the Korean economy for the year from 3.8 to 3.5 percent. The central bank also cut its outlook for next year from 4 to 3.9 percent.

Under these circumstances, it is hoped that the rate cut, which follows an additional 5 trillion won government stimulus package, will provide the much-needed momentum for economic recovery.

The latest rate cut demonstrated to the market that the central bank shares the government’s view of the economy ― that the BOK’s expansionary monetary policy complements the government’s fiscal spending drive and will boost economic players’ confidence in the economy.

In this sense, the BOK may consider cutting the rate further, or at least give a signal to that effect. We suggest this because interest rates are already at rock bottom levels, so much so that some experts are arguing that Korea is already in a liquidity trap, and thus bolder actions might be needed to attain real effects.

Negative side effects from a further rate cut ― such as the growth of household debt and the risk of capital outflows ― should not be ignored, but accelerating the economic recovery should be the priority.

But that said, expansionary monetary policies like a rate cut and increase of fiscal spending alone cannot sustain the momentum for economic recovery and foster growth. The key to attaining this goal is to expand corporate investment and domestic consumption.

The government should take more active, bolder steps, which if necessary could include mobilization of more fiscal resources and sweeping deregulation. That the recent recovery of the real estate market can be attributed largely to a package of government-initiated deregulation and stimulus measures serves as a good reminder of this.

Over the mid and long term, the Korean economy needs to restructure marginal firms and industries, foster new growth engines, especially in the service sector, and promote innovation. These are essential if Korea is to overcome the low-growth trap.