BOK vows to stabilize market amid Fed's tapering uncertainty

SEOUL, Oct. 4 (Yonhap) -- South Korea's central bank said Friday it plans to aggressively pursue measures to stabilize the financial market, if speculation over U.S. monetary stimulus reduction increases market jitters.

Uncertainty over the timing of the Federal Reserve's stimulus cut has grown as the U.S. central bank surprised the market last month by deciding to delay tapering its US$85 billion monthly bond-buying stimulus program.

The Bank of Korea (BOK) said in its monetary policy report that if necessary, it will carry out aggressive open market operations including liquidity injection and purchase of government bonds from the market.

Since mid-May, emerging markets such as India and Indonesia have suffered from excessive cross-border capital flights and currency weakness, beset by growing speculation over the Fed's stimulus tapering.

Korea has differentiated itself from other emerging nations as its current account surplus and the accumulation of the foreign exchange reserves are serving as buffers against possible foreign capital outflow.

The BOK said that the Fed's possible stimulus cut is likely to have limited impact on South Korea as the country is widely viewed as having sound economic fundamentals.

But the BOK added that the possibility of big shocks on Asia's fourth-largest economy cannot be excluded as it is not clear how global financial markets would unravel.

Adding to concerns over the Fed's tapering, Kim Jun-il, a deputy governor of the BOK, told reporters that the BOK is closely monitoring how the U.S. government's temporary shutdown and talks over its debt ceiling develop.

Meanwhile, the BOK said that external economic factors have increasingly affected the bond yields in South Korea since the 2008 global financial crisis.

Concerns over the Fed's tapering have jacked up long-term bond yields globally, steepening the yield curve. Yield curve shows relations between the interest rates and time to maturity.

The BOK said that the pace at which the yield curve steepens is not fast when compared with the past, but there is also a chance that the yield curve would sharply steepen, given the impact of external economic conditions.

"In this case, there is a need to be wary of the possibility that unexpected financial tightening can occur," the central bank said.

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