The Bank of Korea Holds Base Rate Steady as Expected... "Let's Observe the Big Cut Effect" (Comprehensive)

Special Bank Bonds Included in Securities Subject to Open Market Operations

[Image source=Yonhap News]

[Asia Economy Reporter Jang Sehee] The Bank of Korea's Monetary Policy Committee decided on the 9th to keep the base interest rate at the current 0.75%. Since there was a significant rate cut last month and various liquidity supply measures such as repurchase agreement (RP) purchases were introduced, this time they intend to observe the effects of the policy.

Additionally, this is to leave room to respond to future situations such as worsening global financial market conditions and slowing growth rates due to the novel coronavirus infection (COVID-19).

On this day, the Monetary Policy Committee held a meeting chaired by Bank of Korea Governor Lee Ju-yeol and decided to keep the base interest rate at 0.75%. Previously, on April 16, the committee conducted a 'Big cut' by lowering the base rate by 0.5 percentage points through an emergency meeting. The Bank of Korea has only held emergency monetary policy meetings to cut rates twice before: in September 2001 (0.50 percentage point cut) right after the 9/11 terror attacks and in October 2008 (0.75 percentage point cut) during the financial crisis.

The market also believes that it is still too early to judge the effects of the various policies the Bank of Korea introduced in response to COVID-19. This is because the Bond Market Stabilization Fund (BMSF) and the unlimited RP purchase program started operating last week. The judgment is that it is not too late to cut rates after observing the market effects.

Kim Sang-hoon, a researcher at KB Securities, said, "Generally, it takes about six months for monetary policy to have market effects," adding, "They are expected to respond after seeing the first quarter gross domestic product (GDP) growth rate, which will be released at the end of April."

Experts predict that since the Bank of Korea cut rates a month ago, it will focus on economic diagnosis for now and then introduce additional measures.

Gong Dong-rak, a research fellow at Daishin Securities, said, "Since Korea is not a key currency country like the U.S. Federal Reserve (Fed), they are taking a cautious approach to manage the economy," adding, "There is room for one more rate cut, but it will not be easy given the zero interest rate environment." Researcher Kim also stated, "Recently, various countries have introduced measures to stabilize global financial markets," and "It is analyzed that the stabilization of international market prices through these policies also influenced the decision to keep the base rate unchanged."

On this day, the Bank of Korea held the Monetary Policy Committee meeting and approved a revision to the Open Market Operation Regulations to include ▲ Small and Medium Enterprise Financing Bonds ▲ Export-Import Financing Bonds ▲ Korea Housing Finance Corporation Mortgage-Backed Securities (MBS) as eligible securities for simple open market operations. This is the first such measure since the 2008 global financial crisis.

The Bank of Korea stated, "This measure is expected to make it easier for financial institutions to raise funds and reduce funding costs." When the Bank of Korea supplies funds to financial institutions by purchasing special bank bonds such as Korea Development Bank bonds, special banks can issue bonds at lower interest rates. The funds raised this way can be used to purchase corporate bonds, contributing to bond market stability.

Additionally, the Bank of Korea decided to include bonds issued by the Korea Deposit Insurance Corporation as eligible securities for current repurchase agreement (RP) transactions and loan collateral securities. This measure will take effect from the 14th and will be valid until March 31, 2021.

Meanwhile, the next Monetary Policy Committee meeting to decide the base interest rate will be held on May 28.