[비즈한국] The Bank of Korea (BOK) held an extraordinary Monetary Policy Board meeting on December 4, the day after President Yoon Suk-yeol’s declaration of martial law, and announced "financial market stabilization measures." This marked the first time the BOK convened an extraordinary board meeting in four years and nine months, since the aftermath of COVID-19 in March 2020, and the first announcement of financial market stabilization measures in two years and two months, since the Legoland crisis in October 2022.
This is the 5th time since 2000 that the BOK has implemented financial market stabilization measures. Given that it typically takes anywhere from several months to a year for exchange rates and stock markets to stabilize following such announcements, it is expected that a significant amount of time will be required for the financial markets, rattled by this martial law declaration, to regain stability. In particular, concerns are rising that the exchange rate, which takes longer to recover than the stock market, may remain high in the mid-1,400 won range for the foreseeable future.
On the morning of the 4th, the BOK held an extraordinary Monetary Policy Board meeting for over an hour and 40 minutes before unveiling the stabilization measures. The measures were released as market anxiety intensified: the won-dollar exchange rate, which stood at 1,402.9 won on the 3rd, surged to 1,410.1 won on the 4th following the President’s martial law declaration, while the KOSPI index fell from 2,500.10 to 2,464.00 during the same period. The BOK announced that it would temporarily expand liquidity supply and begin purchasing Repurchase Agreements (RPs) to stabilize the financial market.
Specifically, the BOK explained that it would expand the range of institutions eligible for RP trading—currently limited to certain domestic banks, asset managers, and securities firms—to include all banks and asset managers to ensure the smooth supply of won liquidity. Furthermore, the BOK kept the possibility of foreign exchange market intervention open by stating that, in addition to purchasing foreign currency RPs to provide foreign currency liquidity, it would actively implement various stabilization measures in the event of sudden exchange rate volatility.
Despite these BOK measures, volatility in exchange rates and stock prices persists. In the Seoul foreign exchange market, the exchange rate closed at 1,451.9 won on the 19th. This is the first time the exchange rate has exceeded 1,450 won in 15 years and nine months, since the global financial crisis. The KOSPI index also fell to 2,435.93 on the 19th.
Since previous stabilization measures by the BOK took time to show results, it is expected that even more time will be needed to soothe the market anxiety caused by the first martial law crisis in 44 years. In response to the global financial crisis triggered by the Lehman Brothers collapse in September 2008, the BOK cut the base interest rate four times by year-end (October 9, October 27, November 7, and December 11) for a total of 2.25 percentage points. It also supplied a total of 19.5 trillion won to the financial market, including 13.5 trillion won through RP purchases and 1.7 trillion won through government bond purchases and Monetary Stabilization Bond repurchases.
Following the BOK's measures, the KOSPI index, which had fallen by 1.78% in September 2008 and plummeted by 23.13% in October, saw its decline narrow to 3.32% in November and rebounded by 4.50% in December, returning to stability. However, the exchange rate surged from an average of 1,136.64 won in September 2008 to 1,326.81 won in October and 1,400.81 won in November. It was not until October 2009, a full year after the measures began, that the exchange rate returned to the 1,100-won range at 1,163.18 won.
In November 2016, when financial markets were roiled by the surprise election victory of Donald Trump, the BOK implemented stabilization measures. As anxiety spread due to rising U.S. Treasury yields (and falling bond prices), the BOK reduced the issuance of Monetary Stabilization Bonds from 1 trillion won to 300 billion won to stabilize bond prices. Following this action, the KOSPI, which had dropped by 1.23% in November 2016, rose by 2.17% in December.
However, the exchange rate, which was 1,127.65 won in October of that year, continued its upward trend to 1,163.22 won in November and 1,183.30 won in December. The exchange rate finally stabilized in May 2017, six months after the measures were announced, reaching 1,124.65 won.
In 2020, as the financial market crisis deepened due to the COVID-19 pandemic, the BOK held an extraordinary meeting on March 17 and lowered the base rate by 0.50 percentage points, from 1.25% to 0.75%. It also expanded the scope of RP purchases and increased government bond buying. In addition, it lowered the interest rate for the Bank Intermediated Lending Support Facility for companies from 0.50–0.75% to 0.25%. Thanks to these measures, the KOSPI index, which had been declining (-3.58% in January, -6.23% in February, and -11.69% in March 2020), surged by 10.99% in April and maintained a six-month upward trend. The exchange rate, which had climbed from 1,099.03 won in January to 1,131.06 won in March, fell back to 1,118.32 won in April.
When the bond market fell into a panic following the Gangwon Province's default declaration on Legoland debt in September 2022, the BOK announced stabilization measures in October, centered on temporary (6 trillion won) RP purchases and a temporary (3-month) expansion of eligible RP trading institutions. Consequently, the KOSPI, which had plummeted 12.81% in September 2022, rose 6.41% in October. The exchange rate, which had risen from 1,320.35 won in August 2022 to 1,396.50 won in September, climbed further to 1,425.83 won in October, but dropped to 1,357.86 won in November and stabilized at 1,294.42 won in December.