The Bank of Korea said on the 11th it will extend to the end of the year the temporary period for paying interest to financial firms that keep foreign-currency deposits above the statutory ratio. The central bank had not paid interest on such deposits, but as the high exchange rate persisted from late last year, it began paying interest from January to June. With the won-dollar rate recently climbing to just below 1,600 won, the period for paying interest has been extended further.
At a meeting of the Bank of Korea's monetary policy committee held that day, the Bank of Korea decided to extend by six months the payment of interest on excess reserve requirements for foreign-currency deposits kept at the central bank. The Bank of Korea said, "The interest rate applied to excess reserves will follow, as is, the target range of the U.S. Federal Reserve's policy rate." The Bank of Korea has been paying interest of 3.50% to 3.75% annually since January.
Financial firms must place 2% to 7% of their foreign-currency deposits with the Bank of Korea. This is called a reserve requirement. It is a safety device to prepare for the possibility of sudden, large-scale withdrawals. To allow financial firms to park more dollars, the central bank has been paying interest since January. The aim is to keep dollars from flowing out overseas.
The Bank of Korea, together with the Financial Supervisory Service, has been conducting inspections since the previous day on banks that conduct foreign-exchange transactions. The aim is to check whether there were speculative trades or market-disrupting acts. Foreign-exchange authorities view the recent rise in the won-dollar rate as driven by speculative trading. Even taking into account foreigners' net selling of domestic stocks and the Middle East situation, the won's value is falling more than expected.