Bank of Korea RP Purchase Bids 230 Billion Won... Will Liquidity Supply Take a Breather? (Comprehensive)

US Fed Balance Sheet Falls Below $7 Trillion
BOK Has One Unlimited RP Purchase Left...Financial Markets Much Calmer

[Image source=Yonhap News]

[Asia Economy Reporter Kim Eunbyeol] As the U.S. Federal Reserve (Fed) appears to be adjusting the liquidity supply it increased in response to the COVID-19 pandemic, attention is turning to the 'Korean-style quantitative easing (QE).' The Bank of Korea (BOK) has supplied unlimited liquidity to financial institutions for over three months through full allotment repurchase agreement (RP) purchases. Since financial market instability has somewhat eased and demand has sharply decreased, it is judged that, like the U.S., the BOK may adjust the scale of quantitative easing.

According to the BOK on the 21st, the BOK announced that 230 billion won was bid and allotted in the 91-day RP purchase conducted that day. This is about half the amount allotted last week (510 billion won). This is analyzed as a result of reduced liquidity demand as the financial market stabilized. It is reported that recently only securities companies have been bidding in the BOK's RP purchases. The BOK now has the last unlimited RP purchase scheduled for the 28th.

The BOK started unlimited RP purchases, referred to as 'Korean-style QE,' in April. It was originally scheduled to end in June, three months later, but considering the ongoing impact of COVID-19 and the concentration of maturities of the 91-day securities supplied in April, the system was decided to be extended by one month.

Through unlimited RP purchases, the BOK has supplied more than 18 trillion won in liquidity to the market so far. The first auction on April 2 attracted bids exceeding 5 trillion won, and on April 7 and 15, more than 3 trillion won each was supplied through RP purchases. Although the first RP purchase in July attracted bids exceeding 2 trillion won, as the market stabilized, weekly bid amounts mostly remained around 500 billion won after May and June.

Kwon Taeyong, head of the BOK Market Operations Team, said, "After observing the auction results, bidding institutions, and their funding demand, we will announce the RP purchase operation plan around the last auction date." He explained that although the bid size slightly increased in the first RP purchase after the July extension, demand was not high considering the matured amount.

Earlier, BOK Governor Lee Ju-yeol also said at a press conference after the Monetary Policy Committee meeting on the 16th, where the base rate was held steady, "Looking at the auction performance of the RP purchase extension so far, it is significantly below the maturity amount," indicating that "this means the financial companies' funding conditions have considerably improved." He added, "Whether to extend further will be decided soon after reviewing the financial companies' funding demand again and considering several other factors."

Even if the BOK stops unlimited RP purchases, it means it will no longer conduct weekly regular RP purchases, but it plans to engage in RP purchases as needed by the market. It may consider reducing the frequency of RP purchases or raising rates further.

▲US Federal Reserve (Fed) Balance Sheet Falling Below 7 Trillion Dollars

Meanwhile, the U.S. Fed is adjusting the pace of liquidity supply. As of the 15th, the Fed's total assets stood at about $6.95 trillion, down about $300 billion from the peak of approximately $7.17 trillion on June 10. After four consecutive weeks of decline, it has recently increased slightly, but compared to the peak, it has withdrawn nearly 360 trillion won.

Experts believe the Fed is managing liquidity by keeping the base rate at zero and flexibly operating total assets, including RP purchases. Ahead of the U.S. presidential election in November, President Donald Trump is pressuring to maintain low interest rates, and raising the base rate could affect not only the domestic market but also the global market. Therefore, the Fed is controlling liquidity by adjusting the money supply in the financial market.

An academic source commented, "In the past, the Fed raised interest rates first and then adjusted the balance sheet, but recently, since interest rates are entangled with political issues, they are left unchanged." He evaluated, "In the case of the BOK, while the low-interest rate trend causes asset prices like real estate to surge, the real economy such as companies and households is not improving, making the response calculation more complicated than in the U.S."

This content was produced with the assistance of AI translation services.