An employee organizes U.S. dollar bills at the Counterfeit Response Center of Hana Bank in Jung-gu, Seoul. Yonhap News
The Bank of Korea (BOK) has decided to extend by six months, through the end of this year, its program of paying interest on excess foreign currency deposit reserves that financial institutions hold at the central bank. The move is seen as an effort to stabilize foreign exchange supply and demand by encouraging financial institutions to hold foreign currency domestically, while responding to the surge in the won-dollar exchange rate by building up foreign exchange reserves.
The BOK’s Monetary Policy Board decided Wednesday to keep the interest rate on foreign currency reserves linked to the U.S. Federal Reserve’s policy rate target range, unchanged from before. Foreign currency reserves refer to foreign funds that financial institutions deposit at the central bank in excess of their mandatory reserve requirements. The BOK began paying interest on foreign currency reserves for the first time earlier this year and extended the program as the high exchange rate has recently continued.
In a high exchange rate environment, banks can earn risk-free interest income by depositing dollars at the central bank, increasing their incentive to hold foreign currency domestically. The foreign currency reserves boosted in this way also help the BOK expand its foreign exchange reserves.
The latest move aligns with the foreign exchange authorities’ recent market stabilization measures. The authorities conducted a joint verbal intervention at the director-general level Monday, and the National Pension Service (NPS) also began selling forward exchange.
“When foreign exchange reserves increase, the authorities gain greater capacity to respond to the market, which has a psychological stabilizing effect,” a foreign exchange market expert said.