The Bank of Korea plans to soon formalize its liquidity supply method of purchasing repurchase agreements (RPs), which has been implemented on an ad hoc basis in response to financial market instability.
On the 30th, the Bank of Korea announced a report titled 'Open Market Operations: The Path Traveled and the Path Ahead' at a symposium held jointly with the Korean Financial Association. The report was prepared by Lee Jong-seong, Head of Team of the Market Operation Team; Choi Ji-eon, Vice Administrator; and Woo Han-sol, Director.
According to the Bank of Korea, its open market operations have mainly focused on absorbing liquidity. This is because it needed to absorb the domestic liquidity released in the process of purchasing dollars supplied from abroad due to a current account surplus. Instruments such as the sale of monetary stabilization bonds and repurchase agreements (RPs) were utilized in this process.
However, recently, the scale of excess liquidity that needs to be absorbed through open market operations has been decreasing. This is due to a decline in current account surplus from sluggish exports and a surge in domestic investment in overseas securities led by so-called 'dadang' investors. Additionally, the rapid increase in cash currency holdings since the issuance of the 50,000 won bill in 2009 has also reduced excess liquidity, which expanded to 193 trillion won at the end of last year.
Additionally, as the share of the non-bank sector in the financial market increases, these institutions are becoming more influential on market liquidity and short-term interest rates. Furthermore, ▲ economic scale expansion ▲ emergence of new payment methods ▲ adoption of Central Bank Digital Currency (CBDC) are also increasing the volatility of base money demand.
The Bank of Korea noted, 'Considering the changes in the conditions for open market operations, such as reduced liquidity supply from abroad and increased base money demand, we will move away from solely absorbing liquidity and flexibly supply liquidity through regular RP purchases and other means to respond more promptly to changes in base money demand.'
Accordingly, the Bank of Korea has decided to implement regular RP purchases soon, following the RP sales conducted weekly. Since regular RP sales are conducted with a 7-day maturity, RP purchases are likely to proceed with different maturities, such as 14 days, to avoid conflict.
The Bank of Korea also stated, 'In preparation for increasing uncertainty in base money demand in the future, we are reviewing the necessity to expand additional liquidity supply measures.' They elaborated, 'We are currently examining long-term RP purchase systems that can supply liquidity in a fundamental way and standby RP purchase systems that can provide rapid liquidity supply during financial instability.'
In the case of standby RP purchases, certain conditions are set in advance, allowing target institutions to borrow funds through RP purchases whenever needed. Major countries operate standby RP purchase systems in preparation for scenarios where interest rates may fluctuate rapidly, potentially jeopardizing financial stability.
Moreover, Bank of Korea Governor Lee Chang-yong argued that RP purchases should be utilized as a means of quantitative easing. In the welcome remarks at the symposium, he stated, 'Our country should consider whether to introduce balance sheet expansion policies like quantitative easing (QE) as the Policy Rate approaches near-zero levels, similar to advanced countries.' He added, 'We will seek directions for improvement to respond to trends in liquidity changes.'