Korea needs to enhance financial stability: BOK head

Korea's central bank is keeping close tabs on the foreign exchange market to head off a possible increase in the volatility of the local currency against the U.S. dollar, the bank's head said Wednesday,

Korea's currency has appreciated nearly 6 percent so far this year, raising concerns that the won's gain would hurt the country's exports, which account for about 50 percent of the local economy.

"We are seeking to stem excessive volatility of the local currency instead of maintaining the currency rate at a certain level," Bank of Korea (BOK) Gov. Kim Choong-soo said in a forum in Seoul.

Kim said Korea should continue its efforts to dispel potential risks lurking in the financial system and draw up measures to smooth out cross-border capital movement.

Since 2010, Korea has taken a set of macro-prudential steps as the country has fallen victim to volatile capital flows whenever a financial crisis has cropped up.

The governor said that authorities' current inspection into local banks is aimed at checking the effectiveness of the macro-prudential measures.

He added that future policy cannot be made using only the track record of local banks' business practices, hinting that the probe does not necessarily mean that stronger rules will come out soon.

The BOK and the Financial Supervisory Service are looking into local banks' handling of FX derivatives positions, a move which market players say is aimed at curbing the won's gain or prepare to unveil tighter rules.

Kim said on Monday that Korea may strengthen its measures to curb volatile capital movements, if needed, but any such measures would not take on features of capital control.

Quantitative easing (QE) by major central banks is feared to have negative spillover effects on emerging countries, raising the risks of causing asset bubbles and strengthening currencies of emerging countries.

"If developed countries do not recover, the export-dependent emerging countries also cannot grow. That's why balanced approaches and understanding to various policies are needed," Kim said.

The Korean economy loses ground on weak exports and sluggish domestic demand, spawning concerns that the country may enter a low-growth trend phase.

"The main task facing Korea is to brace for economic uncertainty including the protracted eurozone debt crisis and the fiscal cliff risks in the U.S.," Kim added.

But Gov. Kim said that the Korean economy is expected to show a "bounce-back" recovery to some 3 percent for next year. The BOK's 2012 and 2013 growth estimates stood at 2.4 percent and 3.2 percent, respectively.

The BOK froze the key rate at 2.75 percent on Friday following its rate cut in October as recent economic data pointed to improvements. The bank trimmed the rate in July as well.

(Yonhap)