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| Bank of Korea's Senior Deputy Governor Yoon Myun-shik speaks in a press conference over its decision to supply unlimited amount of liquidity to financial institutions for the next three months, at its headquarters in Seoul, Thursday. Courtesy of Bank of Korea |
KOSPI, local currency retreat despite stabilization measures
By Lee Min-hyung
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 have 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.
