Escaping the COVID Market Shock? Bank of Korea Withdraws Financial Market Support (Comprehensive Report 2)

Emergency Measures Such as Expansion of Eligible Collateral Securities to End at the Monetary Policy Committee Meeting on the 11th

No Extension of Emergency Measures Against the COVID Shock, Including Special Bank Bond Purchases

Market Stabilization and Visible Recovery in Major Economies Influence Decision

Measures Affecting the Real Economy to Be Maintained

[Asia Economy, Reporter Kim Eunbyeol] The Bank of Korea is taking steps to withdraw the emergency measures it had repeatedly announced since the COVID-19 outbreak. In March last year, as the global economy faced a shock, the Bank of Korea decided to purchase not only government bonds but also special bank bonds, but now considers these measures no longer necessary and has decided not to extend some of them. This indicates that the economy is moving toward normalization, but attention is focused on the potential impact on financial markets as the amount of funds injected into the market may decrease.

On the 11th, the Bank of Korea held a Monetary Policy Committee meeting and decided to end the ‘simple purchase of special bank bonds’ measure, which was introduced for the first time in 12 years since the financial crisis, by the end of this month. This measure was intended to provide liquidity by purchasing bonds from institutions such as the Korea Development Bank and the Export-Import Bank of Korea, but it was judged unnecessary as the market has stabilized. Since the introduction of this measure, the Bank of Korea has never actually purchased special bank bonds directly. Along with this, the policy including the purchase of Mortgage-Backed Securities (MBS) issued by the Korea Housing Finance Corporation will also end at the end of this month. The range of bonds that banks can use as collateral when borrowing from the Bank of Korea has also been narrowed.

Last year, as the COVID-19 pandemic severely impacted the financial and real economies, the Bank of Korea announced a series of bond purchase measures along with interest rate cuts. As the COVID-19 situation eased, some measures began to be lifted. Following the suspension of the unlimited repurchase agreement (RP) purchase system that supplied unlimited liquidity to financial institutions in July last year, the lending measures targeting securities and insurance companies were also concluded from the 3rd of last month.

‘C-Shock Tunnel Passed’ Assessment... Most Support Ended in the U.S. as Well

The Bank of Korea’s withdrawal of various measures is based on the easing of market shocks caused by uncertainty and the visible recovery trend in major economies. The Organisation for Economic Co-operation and Development (OECD) raised its forecast for global economic growth this year to 5.6%, up 1.4 percentage points, citing the $1.9 trillion U.S. stimulus package. A year ago, the market was so unstable that central banks had to use their note-issuing power to support financial institutions, but now the market has stabilized to the extent that there are concerns about asset prices rising excessively. A Bank of Korea official explained, "As liquidity conditions in the domestic financial market have recently improved, the need to extend measures implemented to expand the liquidity supply base during the COVID-19 response has decreased."

The U.S. Federal Reserve (Fed) has also ended all but one of the nine emergency lending programs introduced after the COVID-19 outbreak. The remaining program is the Paycheck Protection Program Liquidity Facility (PPPLF), which supports liquidity for financial institutions participating in the Paycheck Protection Program (PPP) for small businesses (with 500 or fewer employees). However, the recent rise in market interest rates is a variable. The 3-year Treasury bond yield has exceeded 1% this year and recently rose above 1.2% for the first time in two years. The interest rate level is similar to that during last year’s financial market shock. The Bank of Korea judges that the recent rise in market interest rates is a phenomenon arising from the economic recovery process and is therefore different from last year.

The Real Economy Remains Bleak... Measures Affecting the Real Economy, Such as the Base Interest Rate, Remain in Place

Although central banks are withdrawing market measures and signaling that the ‘financial emergency situation seems to be over,’ many assessments say the real economy is still in a tunnel. According to Statistics Korea, the number of unemployed people in January this year reached a record high of 1.57 million. The unemployment rate was 5.7%, the highest since February 2000 (5.7%). The government also evaluated in the Green Book (recent economic trends) that "although export recovery has expanded, uncertainties in the real economy persist due to domestic demand contraction caused by strengthened social distancing and a slowdown in employment indicators."

While the Bank of Korea is withdrawing measures to support the financial market, the reason it cannot easily reverse measures supporting the real economy, such as the base interest rate, lies here. The Bank of Korea is placing weight on the possibility of extending the Financial Intermediation Support Loan, one of the real economy support measures. The Bank of Korea has prepared a total of 43 trillion won in related loan support funds, of which 80.1% had been used as of last month’s allocation.

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