By Na Jeong-ju
Staff Reporter
The outstanding amount of monetary stabilization bonds the Bank of Korea (BOK) issued to absorb excess liquidity on the market decreased last year for the first time in a decade as a rise in tax revenue helped curb liquidity growth, the central bank said Tuesday.
The balance of monetary stabilization bonds stood at 150.3 trillion won as of the end of last year, down 8.5 trillion won from a year ago. The balance has fallen since its peak of 164 trillion won at the end of October in 2006.
It is the first time that the outstanding amount of the bonds dropped since it fell by 1.6 trillion won in 1997. The central bank forecast the balance will be flat or fall slightly this year.
``Last year, the bank issued less monetary stabilization bonds as a rise in oil and property taxes played a role in curbing rises in liquidity,'' a BOK official said. ``In addition, the BOK raised the quota of banks' deposits at the central bank to strengthen its role as the `bank for banks,' which helped absorb liquidity on the market.''
The rise in the issuance of monetary stabilization bonds had raised the interest burden for the BOK. The increased interest costs for the bonds were the main reason for its huge losses. The central bank recorded some 1 trillion won in operating losses last year, compared with 1.8 trillion won in 2006, 1.87 trillion won in 2005 and 150 billion won in 2004.
The BOK paid more than 7 trillion won ($7.3 billion) to cover interest payments on monetary stabilization bonds last year, according to the central bank.
When the Korean currency rises excessively against the dollar, the central bank and government usually intervene in the currency market via state-run banks, which buy dollars to help slow the pace of the won's gain. The purchase of dollars means more supply of the won on the market and the central bank needs to issue monetary stabilization bonds to absorb extra liquidity and to ease inflationary pressure.
``This year, the currency market is expected to be not as volatile as past years,'' a BOK official said. ``This means that the balance of monetary stabilization bonds will be flat or drop slightly in 2008.''
The won's rise against the dollar usually forces the government to maintain its intervention in the currency market. This means the central bank may have to issue more monetary stabilization bonds, negatively affecting its balance.