BOK to sup­ply ‘un­lim­ited liq­uid­ity’ via repo pro­gram

KOSPI, lo­cal cur­rency re­treat de­spite sta­bi­liza­tion mea­sures

The Korea Times - - FRONT PAGE - By Lee Min-hyung mh­[email protected]­re­atimes.co.kr

The Bank of Korea (BOK) said Thurs­day that it will sup­ply “un­lim­ited liq­uid­ity” to fi­nan­cial firms for the next three months by pur­chas­ing lo­cal bonds to help avoid a pos­si­ble credit crunch and buoy the sag­ging econ­omy bat­tered by the coro­n­avirus pan­demic.

This is the first time for the cen­tral bank to in­tro­duce such a mea­sure, viewed as the Korean ver­sion of quan­ti­ta­tive eas­ing, un­der which it will buy bonds in repo auc­tions ev­ery Tuesday un­til the end of June.

The BOK ex­plained the step is ex­pected to add enough liq­uid­ity to the mar­ket and help stim­u­late the econ­omy at a time when the na­tion is suf­fer­ing an un­prece­dented eco­nomic cri­sis, as the global spread of COVID-19 con­tin­ues to pose a grow­ing threat to the ex­port-driven Korean econ­omy.

Un­der the plan, fi­nan­cial in­sti­tu­tions can bor­row funds at the repo rate of no more than 0.85 per­cent. The rate is based on the cur­rent base rate of 0.75 per­cent plus an ad­di­tional 0.1 per­cent­age point, ac­cord­ing to the BOK.

The de­ci­sion in­di­cates the govern­ment’s strong de­ter­mi­na­tion to re­vi­tal­ize the econ­omy in an un­prece­dented step taken amid grow­ing fears of eco­nomic tur­moil here. The cen­tral bank did not play this card even dur­ing the 1997-98 Korean and 2008 global fi­nan­cial crises.

The BOK said the lat­est move can be seen as “de facto quan­ti­ta­tive eas­ing,” as its pri­mary pur­pose is to in­crease the money sup­ply on the mar­ket.

“Ma­jor cen­tral banks from de­vel­oped coun­tries have pushed for quan­ti­ta­tive eas­ing af­ter slash­ing their base rate to zero,” BOK Se­nior Deputy Gov­er­nor Yoon Myun-shik said in a press con­fer­ence Thurs­day.

“Against this back­drop, the BOK’s liq­uid­ity sup­port pol­icy may look some­what dif­fer­ent,” he added. But the gist of the move is sim­i­lar to the con­cept of quan­ti­ta­tive eas­ing, so it was not nec­es­sar­ily wrong to call it this, ac­cord­ing to Yoon.

The cen­tral bank cut its key in­ter­est rate by 50 ba­sis points to 0.75 per­cent in mid-March amid es­ca­lat­ing con­cerns that the spread of the virus may put the sag­ging econ­omy into re­ces­sion.

The rate cut came shortly af­ter the U.S. Fed­eral Re­serve cut its rate to a range 0 per­cent to 0.25 per­cent over the ris­ing fear that the virus spread there would leave worse-than-ex­pected eco­nomic dam­age across the coun­try.

Yoon also made it clear that the cen­tral bank does not have an im­me­di­ate plan to cut its rate fur­ther by hold­ing an­other emer­gency mone­tary meet­ing as it did a few weeks ago.

“We cut the rate on March 16 in an emer­gency mone­tary board meet­ing, and any plans over an ad­di­tional rate cut will be dis­cussed dur­ing the sched­uled meet­ing slated for April 9,” he said.

Yoon also hinted at the pos­si­bil­ity that the BOK could pur­chase com­mer­cial pa­pers on the con­di­tion of get­ting govern­ment guar­an­tees.

The re­marks come fol­low­ing grow­ing calls for the cen­tral bank to be al­lowed to buy cor­po­rate bonds and com­mer­cial pa­pers as the U.S. Fed does.

Amid the grow­ing con­cerns over weak dol­lar liq­uid­ity here, the Min­istry of Fi­nance and Econ­omy also un­veiled a plan to lower the for­eign ex­change liq­uid­ity cov­er­age ra­tio for banks to 70 per­cent un­til the end of May from the cur­rent 80 per­cent. The move is aimed at en­hanc­ing for­eign cur­rency liq­uid­ity.

Korea Cap­i­tal Mar­ket In­sti­tute econ­o­mist Kang Hyun-ju gave an op­ti­mistic out­look on the cen­tral bank’s de­ci­sion.

“The BOK’s plan to guar­an­tee liq­uid­ity in the mar­ket ap­pears to be a step in the right di­rec­tion by pos­si­bly gen­er­at­ing syn­ergy with re­cent govern­ment poli­cies to sta­bi­lize the stock and bond mar­kets,” he said.

Cou­pled with mar­ket sta­bi­liza­tion funds, the govern­ment an­nounced a plan Tuesday to set up a 100 tril­lion won emer­gency aid fund for lo­cal firms hit by the sales and ex­port de­clines due to the COVID-19 out­break.

De­spite the series of mar­ket sta­bi­liza­tion mea­sures from the cen­tral bank and the fi­nance min­istry, the bench­mark KOSPI failed to con­tinue its two-day win­ning streak Thurs­day on for­eign in­vestors’ con­tin­ued sell­ing spree of Korean stocks. The KOSPI closed at 1,686.24, down 1.09 per­cent from the pre­vi­ous day; but the sec­ondary Kosdaq gained 10.93 points, or 2.16 per­cent, to close at 516.61.

The won-dol­lar ex­change rate closed at 1,232.8 won per U.S. dol­lar, up 2.9 won from a day ear­lier.

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