Seoul  - South Korea's central bank on Thursday cut interest rates for the sixth time in four months to 2 per cent, a new record low, as the country heads towards recession.

The Bank of Korea cut its base rate by 0.5 percentage points to 2 per cent.

Since October, the rate was slashed by 325 basis points, but bank Governor Lee Seong Tae did not rule out further cuts to counter the recession threatening the country for the first time in 11 years.

"The economy is contracting at a faster-than-expected pace and is highly likely to post negative growth this year," Lee said in Seoul. Further rate cuts were possible, but the speed would be adjusted after close examination of the financial markets, he added.

"Domestic consumption and investment have slackened off further and exports have decreased rapidly," the bank said in a statement. The export-oriented country was hit particularly hard by the sharp drop in global demand.

The latest rate cut followed warnings by new Finance Minister Yoon Jeung Hyun that South Korea's economy was likely to contract by 2 per cent this year. The government had previously predicted a 3-per-cent growth of the gross domestic product (GDP).

South Korea's economy is heading towards its first recession since the Asia crisis in the late 1990s. The GDP contracted by 5.6 per cent in the last quarter of 2008, compared with the same period last year.

The International Monetary Fund in early February predicted a 4-per-cent contraction for Asia's fourth-largest economy. In 2008, South Korea's economy grew by 2.5 per cent. (dpa)