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Issue Report

Collection of full-length papers and in-depth analysis of economic and management issues.

Exit Strategy for Korea's Monetary and Financial Policies

Exit Strategy for Korea's Monetary and Financial Policies

YU Jung-Suk

Dec. 24, 2009

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Originally released on November 12, 2009

I. The Need for Exit Strategies

Amid the unprecedented global financial crisis, the Bank of Korea (BOK) carried out bold monetary and financial policies to stabilize the financial market and prevent a sharp economic downturn. It took on six drastic benchmark interest rate cuts, lowering the rate from 5.25% to 2.0% from October 2008 to February 2009. The lending rate on aggregate credit ceiling loans (aimed at encouraging banks' credit supply to small and medium-sized enterprises (SMEs)) was also lowered from 3.5% to 1.25%. To ease the won-denominated liquidity squeeze, the BOK purchased long-term and irregular repurchase agreements (RPs), government bonds, and repurchased monetary stabilization bonds. And to improve liquidity situation of the bond market, the BOK also set up the Bond Market Stabilization Fund.

In addition, massive foreign currency liquidity injections were carried out to ease the worsening foreign currency supply conditions and mitigate the excessive volatility of the foreign exchange market. To improve the imbalance of the demand and supply of foreign liquidity, foreign currency-denominated loans were supplied to local banks using liquidity from currency swaps with the central banks of the US, China and Japan. Payment guarantees on all bank foreign currency borrowings from abroad were also provided. Furthermore, it bought the banks ' subordinated bonds and new hybrid securities through a 20 trillion won Bank Recapitalization Fund to enhance their financial soundness and increase lending capability to the private sector.

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