S. Korea starts 1st quantitative easing operation

South Korea’s central bank on Thursday funneled around 5.2 trillion won ($4.2 billion) of liquidity to the financial markets shaken by the novel coronavirus, through its first round of auctions held in conjunction with its “unlimited” repo operations.

The Bank of Korea last week, in an unprecedented move, vowed to inject more liquidity into the market over the next three months through a repurchase agreement or repo operations, allowing securities to be sold and then repurchased at a later date. This serves as short-term borrowing for dealers in government securities.

The BOK accepted a combined 5.25 trillion won in bids from financial institutions including banks and brokerages for 91-day repo agreements at an interest rate of 0.78 percent. The rate is slightly higher than the current benchmark rate of 0.75 percent.

The auctions will be held every Tuesday -- except for this week – until the end of June, when financial institutions will be able to purchase securities at the maximum repo rate of 0.85 percent, according to the BOK. The central bank will also regularly purchase local bonds via repo operations every week, pumping liquidity into money markets.

In a meeting with ranking officials Thursday afternoon, BOK Gov. Lee Ju-yeol raised the possibility of providing extra funds to non-financial institutions as well to quell the corporate bond market recently hit by an exodus of overseas investment. If this materializes, it would be a rare move on behalf of the central bank, which generally stabilizes the market through lenders or open-market operations.

But the support would be carried out within a legal framework and not in favor of certain companies, Lee noted.

In deciding the level of its repo rate, the BOK said it considered factors including the nation’s three major bond rating agencies’ data on yields of 91-day monetary stabilization securities. It also decided against setting the rate lower than the current benchmark rate, judging that the size of the bid could go much higher than necessary and the market could misinterpret it as a rate cut signal.

Earlier this week, the BOK offered $8.72 billion for local financial institutions in its first round of a dollar-lending auction. It was part of the BOK’s $60 billion currency swap deal signed with the US Federal Reserve on March 19 to tap the brakes on the latest dollar crunch.

Korea currently holds bilateral currency swap agreements with eight countries, including Australia, Canada and China.

Deputy Prime Minister and Finance Minister Hong Nam-ki stressed the need for more currency swap deals at a virtual meeting of the G-20 finance ministers and central bank governors on Tuesday to help the impending global recession.

By Jung Min-kyung (mkjung@heraldcorp.com)