BOK: "Liquidity Support Scale Will Be Determined Based on Market Conditions" [Q&A]

Press Conference on Financial and Foreign Exchange Market Review and Market Stabilization Measures Implementation

The Bank of Korea stated on the 4th that it will decide the scale of liquidity support for the unscheduled repurchase agreement (RP) purchases based on market conditions.

Park Jong-woo, Deputy Governor of the Bank of Korea, said at a press conference held after the emergency monetary policy committee meeting related to the declaration of martial law, "Considering the financial market situation, the market is relatively stable compared to the times of COVID-19 and bond market instability (Legoland incident)." He added, "Currently, since we are lowering interest rates and moving toward a monetary easing stance, concerns about market instability are relatively smaller than before."

Choi Yong-hoon, Director of the Financial Market Department at the Bank of Korea, explained, "The scale of RP liquidity support will be determined based on market conditions," adding, "We plan to implement it over a sufficient period and comprehensively reflect the market sentiment as much as possible when making the decision."

Regarding the overnight exchange rate volatility rising to the 1,440 won level after the declaration of martial law, it was evaluated as a reasonable level. Yoon Kyung-soo, Director of the International Department at the Bank of Korea, said, "There is nothing particularly unusual in liquidity-related indicators," and "The liquidity situation appears to be sound."

Below is a Q&A session with Lee Byung-mok, Director of the Financial Settlement Department; Choi Yong-hoon, Director of the Financial Market Department; Park Jong-woo, Deputy Governor; Choi Chang-ho, Director of the Monetary Policy Department; and Yoon Kyung-soo, Director of the International Department.

- It seems that this measure has little impact on the market. What are the expected effects on the bond and exchange rate markets going forward? Although this is a market stabilization measure, you mentioned 'promptly.' It was done during market hours, and the emergency monetary policy committee meeting was postponed. What is the reason?

▲(Park Jong-woo, Deputy Governor) A comprehensive document reflecting opinions from various institutions was released in the morning during the F4 meeting. After that, we convened an emergency monetary policy committee meeting to organize the response direction of the committee members. For matters requiring monetary policy committee approval, we went through the approval process before announcing.

▲The volatility, which had greatly expanded, is now somewhat calming down. We have implemented several backstop measures, but how much these measures will be utilized in the financial market depends on the market situation. If the backstop measures contribute to stabilizing financial market sentiment, actual usage may not expand significantly, but we plan to consider additional measures as needed.

- Is it decided to proceed or just considering? Is the RP purchase confirmed?

▲Yes, it is confirmed.

- Does this mean simple purchase of government bonds is possible?

▲Yes, it is under consideration if necessary.

- Does foreign currency RP mean liquidity supply will start or might start?

▲(Yoon Kyung-soo, Director of International Department) Since there is no significant problem with foreign currency liquidity, it can be understood that it will be done if necessary. The CDS rose overnight but mostly fell back. There is nothing particularly unusual in liquidity-related indicators. The liquidity situation appears sound. No significant changes have appeared yet in the foreign currency funding market.

- How will the full allotment RP purchase proceed if necessary?

▲(Park Jong-woo) There are various measures available. Among them, we mentioned parts that require immediate implementation considering the current financial and foreign exchange market situation. "If necessary" means that we will actively consider implementation depending on future changes in the situation.

- You said foreign exchange market liquidity is sound. The exchange rate exceeded 1,410 won and rose to 1,440 won yesterday. At what level is liquidity support needed?

▲(Yoon Kyung-soo) The rise in the exchange rate in the foreign exchange funding market should be understood differently from funding supply related to funding. In foreign currency funding, it is judged by the rise in funding rate spreads, but there were no unusual signs there. The exchange rate rose significantly yesterday but then fell back. Market participants have mixed evaluations; some see it as a positive phenomenon, while others express concern. The exchange rate rose to 1,442 won yesterday, started at 1,418 won early in the session, dropped to 1,407 won, then rose to 1,415 won. Since the market opened today, it has moved almost in line with the dollar value fluctuations.

- Is there a possibility of expanding securities eligible for open market operations? What is the scale of RP liquidity support?

▲(Park Jong-woo) The measures are at the same level as when expanded during the COVID-19 response and the 2022 bond market instability. Additional expansion will be carefully reviewed but is unlikely.

▲(Choi Yong-hoon, Director of Financial Market Department) The scale of RP liquidity support will be determined based on market conditions. We plan to implement it over a sufficient period and comprehensively reflect market sentiment when deciding.

- How does the current market situation compare to the past? Political and economic shocks are expected after yesterday’s situation. Has your assessment of our economic situation changed? What is the impact on the interest rate path?

▲(Park Jong-woo) Compared to the times of COVID-19 and bond market instability (Legoland incident), the financial market is relatively stable. Since we are currently lowering interest rates and moving toward a monetary easing stance, concerns about market instability are relatively smaller than before. It is difficult to comment on the impact on the interest rate path as less than a day has passed, and we need to assess the effects.

- Was there any discussion about the base interest rate at today’s emergency monetary policy committee meeting? There is a long time until the next meeting. Are you ruling out holding an emergency meeting about the base rate before then?

▲(Park Jong-woo) There was no discussion about the base interest rate at today’s meeting. We need to observe and assess the impact of this incident on the financial and foreign exchange markets. The impact on macroeconomics such as growth and inflation also requires time to monitor. It is too early to comment.

- It seems you consider the situation settled for now. Did you discuss responses to additional measures? What will you do if overnight events repeat?

▲(Park Jong-woo) It is not possible to speculate on future political situations. We have implemented immediate measures and mentioned that we can expand them step-by-step depending on changes. We prioritize the press release content and will consider additional responses as the situation evolves.

- The Financial Services Commission mentioned the scale of liquidity measures, but the Bank of Korea did not. Is there a concern that liquidity expansion might stimulate inflation?

▲(Choi Yong-hoon) We plan to supply RP over a sufficient period, with intervals of several weeks. The scale will be decided at a level sufficient to calm market instability considering overall market liquidity.

▲(Park Jong-woo) The Financial Services Commission sets a certain scale, but we supply based on market demand without setting a specific scale. The impact of this liquidity expansion on inflation depends on market conditions, so it is difficult to say definitively how much impact it will have.

- Were there any sections with strong funding demand requests yesterday or today?

▲(Choi Yong-hoon) There were no special funding requests, and market instability did not spread significantly. When supplying liquidity through RP purchases, the scale and duration are important. We plan to supply with maturities of several weeks at a time. Whether to increase the scale when maturities come due will be decided based on the situation.

▲(Park Jong-woo) We will supply sufficient liquidity as needed. If there is market demand, we will increase the supply scale. "Sufficient" means supplying as much as necessary.

- Are Articles 64 and 80 of the Bank of Korea Act matters requiring additional monetary policy committee approval? How much will the net transfer limit be expanded? Please explain specifically whether collateral setting is a necessary measure. Could the monetary policy committee’s judgment on necessity differ?

▲(Park Jong-woo) Monetary policy committee approval is required. Articles 64 and 80 may require specifying counterparties, and we can respond immediately if necessary.

▲(Lee Byung-mok, Director of Financial Settlement Department) The net transfer limit for financial institutions is currently sufficient. Even considering the overnight utilization rate, it remains stable as usual. If the utilization rate of some financial institutions rises sharply, we will consult and expand the net transfer limit and set collateral as needed.

▲(Park Jong-woo) Since loans are made on a case-by-case basis, the monetary policy committee will judge at that time. However, individual loans require many prior processes. We will carefully review and prepare these in advance. If judged necessary, we will act immediately. Article 80 procedures take longer. The monetary policy committee must assess the situation, and loan agreements must be finalized beforehand. We plan to prepare these in advance.

- You said the foreign exchange market is stable, but for the general public, 1,400 won is an unfamiliar number. Even with the global king dollar, it seems an explanation is needed to say it is stable.

▲(Yoon Kyung-soo) We said the funding market is stable, not the exchange rate. It is true that volatility rose overnight, but it has since fallen back, indicating a move toward stability. It is generally not policy to comment on exchange rate levels. The foreign exchange authorities control the speed of rapid changes, so it is difficult to directly evaluate the level.

- The Deputy Prime Minister said last night that liquidity supply would be 'unlimited,' but today it was 'sufficient.' Is this because the market has calmed?

▲(Park Jong-woo) They essentially mean the same thing. Since we are proceeding step-by-step, we said 'sufficient.' Additional measures will supply as much as the market demands. There is no significant difference between the two expressions.

- The chairman convenes an emergency monetary policy committee meeting if necessary or if two or more members request it. Did the Governor convene it? Two members were on business trips. Did all participate and approve?

▲(Park Jong-woo) The emergency monetary policy committee meeting was convened because the situation was urgent. We informed the members about the possibility of convening, and Governor Lee Chang-yong and the committee members discussed and decided. The two absent members did not attend today’s meeting.

▲(Park Jong-woo) We view the situation very seriously. We will mobilize all capabilities of the Bank of Korea to respond. Since the situation is very serious and market monitoring is necessary, we plan to convene an emergency response task force every morning and afternoon to check the financial and foreign exchange market situation for the time being.