BOK preparing for U.S. debt-ceiling crisis

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BOK preparing for U.S. debt-ceiling crisis

The Bank of Korea said yesterday it was closely monitoring the progress of U.S. debt ceiling negotiations and would act aggressively to provide liquidity and buy sovereign bonds if external shocks disrupt local markets.

Against the background of the U.S. government shutdown and Congress potentially failing to raise the debt ceiling, the Bank of Korea said it would strengthen communication with markets and monitor market expectations as it works to maintain calm.

“If needed, the central bank will work toward financial stability through aggressive open market operations including the expanded supply of liquidity and sovereign bond purchases,” the bank said in its biannual monetary policy report.

Korean policy makers in recent weeks have also heightened their guard against excessive foreign capital inflows sparked by the U.S. Federal Reserve’s anticipated tapering of its stimulus.

Despite potential market jitters, Asia’s fourth-largest economy is still well on its way to recovery, the central bank report said, with mixed risks in its future growth path.

“Korea faces downside risks from the Fed’s plan to taper its quantitative easing, Japan’s Abenomics and the possibility of easing growth in China,” the Bank of Korea said.

Abenomics refers to Japan’s massive monetary easing that aims to lift inflation to 2 percent in roughly 2 years.

During the third quarter - the first full one after Chairman Ben S. Bernanke talked about tapering the Fed’s stimulus - the Korean won rose 6.3 percent as funds flowed in. That was its biggest quarterly gain since the July-September period of 2010.

Dealers have suspected South Korean government authorities intervened several times in September and also this week to keep the Korean won from firming against the dollar too swiftly.

Bank of Korea said strengthened growth in the U.S. and Japan would act as upside risks to the local economy.

Asia’s fourth-largest economy is expected to keep to its recovery path while inflation, which has dipped to record lows this year, will tick up towards the middle of the central bank’s target band of 2.5 to 3.5 percent next year, after remaining subdued for the time being, the central bank said.

Consumer price pressures have diminished considerably this year, with September’s annual inflation dropping to a 14-year low of 0.8 percent, raising concerns on lagging domestic consumption in the country.

Reuters

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