South Korea's central bank said Monday it plans to aggressively map out measures to stabilize the financial markets as high currency volatility is feared to hurt the Korean economy.
"While closely monitoring the financial markets, if needed, we plan to pump liquidity into the financial system and flexibly manage the macro-prudential measures," Bank of Korea Gov. Kim Choong-soo told lawmakers.
The governor said that the central bank continues to keep tabs on possible outflow of foreign capital and impacts of increased geopolitical risks on the financial markets.
The yen weakened toward 100 per the U.S. dollar in Asian trading Monday after the Group of 20 major economies stopped short of criticizing Japan's powerful monetary easing in a communique released following a G20 meeting in Washington.
The yen's weakness has unnerved Korean policymakers as it makes prices of Korean goods relatively more expensive in overseas markets compared with those of their Japanese rivals. The Korean currency has appreciated more than 26 percent against the yen since September.
The governor said the G20 also harbors growing doubts about the success of Japan's move, adding that it also gives some constraints by stressing fiscal consolidation.
Meanwhile, Gov. Kim said that the BOK plans to focus its monetary policy on preventing the country's growth potential from being hurt as well as maintaining price stability over the long haul.
He said that continuation of a low-growth trend is feared to undermine the country's long-term growth potential, or the maximum rate at which an economy can grow without triggering inflation.
"The BOK will continue its efforts to tame inflation expectations while closely monitoring external economic risks as well as geopolitical risks (from North Korea)," the governor said.
His remarks came as the central bank surprised the market by freezing the key interest rate at 2.75 percent for the sixth straight month in April.
The BOK resisted government pressure to lower the benchmark 7-day repo rate in April, throwing cold water on the local bond market, which had excessively bet on a rate cut ahead of the April policy meeting.
"I have not given wrong signals to the market. Market players did not trust my remarks," Gov. Kim told lawmakers.
He said he will maintain his four-year term, which ends in March next year, in a bid to defend the central bank's autonomy in managing the rate policy.
More analysts cautiously anticipate that the BOK may leave the key rate untouched for the rest of the year. But still, some market analysts expect the central bank to lower borrowing costs in 2013.
Gov. Kim defended the bank's rate-freeze decision at a press conference held in Washington on Sunday, saying that the decision will definitely help the government's drive for stimulus as policies just have different timing to generate the intended impact.
The BOK said it will not buy government bonds directly from the market, but it will do its part through its open market operations if the government's proposed extra budget worth 17.3 trillion won ($15.4 billion) raises market rates.
The government usually finances its extra budgets by issuing more treasury bonds, which jacks up the borrowing costs, crowding out corporate investment.
The BOK now expects that the Korean economy is likely to grow 2.6 percent this year, underperforming the country's potential growth rate of around 3.8 percent for the second straight year. The government's 2013 growth estimate stood at 2.3 percent. (Yonhap News)
