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SEOUL, December 19 (AJP) -The Bank of Korea (BOK) on Friday moved to shore up foreign-exchange market liquidity to help stabilize the won, announcing temporary regulatory relief and incentives for financial institutions in desperate move to buttress the local currency without direct intervention.

At an emergency meeting held Friday, the central bank’s Monetary Policy Board approved a six-month package of measures to be applied from January through June next year. The steps follow a joint government–BOK announcement a day earlier outlining a “flexible adjustment plan” for the foreign-exchange stability framework.

Under the measures, the BOK will for the first time pay interest on excess foreign-currency reserve deposits held by financial institutions in hopes to keep their dollar holdings at home. Previously, banks earned no return on such deposits, but they will now receive interest benchmarked to the U.S. Federal Reserve’s target policy rate range of 3.50 to 3.75 percent.

The board also decided to fully waive the foreign-exchange stability levy over the same period. The levy, imposed on non-deposit foreign-currency liabilities under the Foreign Exchange Transactions Act, was introduced to curb excessive foreign-currency borrowing. The waiver is expected to reduce banks’ dollar funding costs and encourage a greater supply of foreign currency to the market.

Yoon Kyung-soo, director general of the BOK’s International Department, said the levy waiver alone would lower financial institutions’ foreign-currency funding costs by about 10 basis points. He added that paying interest on foreign-currency reserves would strengthen banks’ liquidity buffers while also supporting profitability.

The BOK said the measures would reinforce exchange-rate stabilization efforts alongside regulatory easing announced by the government, which included postponing foreign-currency liquidity stress tests and raising the cap on foreign banks’ forward foreign-exchange positions from 75 percent to 200 percent.

Yoon said the central bank convened the emergency monetary policy meeting after judging that recent exchange-rate movements reflected a severe imbalance between supply and demand, but stressed that “this is not a situation comparable to last year’s martial law-related crisis.”

He noted that foreign-currency funds previously managed overseas would effectively remain in South Korea if deposited at the BOK, easing pressure on the market.

He also said any early-January inflows of excess reserve deposits would be manageable, as foreign-exchange reserves are calculated at month-end. Potential increases in currency-hedging demand from the National Pension Service, he added, were unlikely to pose a major risk, though adjustments could take time.

Earlier this week, the central bank has extended $65 billion currency swap arrangement with the NPS.

The move marks the first emergency Monetary Policy Board meeting since December 4 last year, immediately after the declaration of martial law.
* This article, published by Aju Business Daily, was translated by AI and edited by AJP.
Jang Suna 기자 sunrise@ajunews.com

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