Seoul, South Korea – In a proactive move aimed at curbing foreign exchange market volatility, the Bank of Korea (BOK) announced a package of regulatory easing and temporary financial incentives for banking institutions on Friday. This followed an extraordinary emergency meeting of the Monetary Policy Committee, the first of its kind since the events of December of last year.
Exemptions and incentives to reduce the cost of the dollar
The Central Bank has decided to temporarily exempt financial institutions from the “foreign exchange safety fees” stipulated under the Foreign Exchange Transactions Law. This exemption will be in effect for six months, from January to June 2026. These fees are typically levied on external debt exceeding a certain threshold. The aim of this exemption is to:
Reducing borrowing costs: Lowering the cost of purchasing foreign currencies by approximately 10 basis points (0.1%).
Increased supply: Encouraging banks to increase the supply of dollars in the local market to meet high demand.
A historic step: Paying interest on foreign currency reserves
In a move being implemented for the first time in the bank’s history, it was decided to pay interest on foreign exchange reserves deposited by financial institutions with the central bank, according to Yonhap News Agency.
Yoon Kyung-soo, director of the International Affairs Office at the Bank of Korea, explained that the applied interest rate would be based on the US Federal Reserve’s target (currently between 3.50% and 3.75% annually). This move aims to:
Boosting liquidity: Increasing the incentive for banks to maintain strong foreign currency reserves.
Attracting deposits: Enabling banks to offer better terms to businesses and individuals to deposit their hard currency savings within the country rather than abroad.
Critical timing and exceptional context
These emergency measures come at a time when the South Korean won is under severe pressure. The exchange rate has approached 1,480 won to the dollar. This extraordinary meeting of the Monetary Policy Committee is the first since the December 4, 2014 meeting, which followed the declaration of martial law. This reflects the seriousness of the risks the bank perceives in the current liquidity environment.
It is worth noting that the Bank of Korea had resorted to similar exemptions (for only 3 months) during the COVID-19 pandemic in 2020. However, today’s measures appear to be more comprehensive and longer-term, in addition to including an incentive interest rate for the first time.
