[Q&A] Bank of Korea: "Purchasing over 7 trillion won in government bonds possible depending on market conditions"

Bank of Korea Monetary and Credit Policy Report Briefing Session

On the morning of the 11th, the Monetary and Credit Policy Report briefing was held at the Bank of Korea. From the left in the photo: Lee Jeong-ik, Head of the Price Trends Team; Park Jong-seok, Deputy Governor; Lee Sang-hyung, Director of the Monetary Policy Bureau; Bong Gwan-su, Head of the Policy Cooperation Team. Photo by Lee Jeong-ik

[Asia Economy Reporter Eunbyeol Kim] The Bank of Korea (BOK) has indicated that it may proceed with the purchase of government bonds exceeding 7 trillion won this year, depending on market conditions. Earlier, the BOK had announced plans to purchase government bonds worth 5 to 7 trillion won in the first half of this year, but it expressed its willingness to buy more bonds if necessary to stabilize the market.

On the 11th, Park Jong-seok, Deputy Governor of the BOK, stated at a briefing on the Monetary and Credit Policy Report held at the BOK headquarters, "The rise in domestic long-term interest rates since August last year is the result of a combination of factors including the U.S. interest rate hikes, easing of domestic and international economic indicators and risk aversion sentiment, and the burden of government bond supply and demand." He added, "Concerns about an increase in government bond issuance during Korea's COVID-19 response and economic recovery support efforts also contributed to the rise in long-term interest rates."

The total planned issuance of government bonds based on this year's finalized budget is 176.4 trillion won, which is similar to last year's total issuance of 174.5 trillion won, including the 1st to 4th supplementary budgets. The additional issuance of government bonds due to supplementary budgets for COVID-19 responses, such as the 4th disaster relief payments, has further increased supply and demand burdens.

When asked whether the purchase amount could exceed 7 trillion won depending on market conditions, Deputy Governor Park replied, "I think that is possible," adding, "If market interest rates fluctuate unexpectedly beyond the already announced purchase plan, we may conduct one-time government bond purchases when such situations arise."

Regarding the recent rebound not only in long-term but also in medium- and short-term interest rates, he explained, "We are closely monitoring the 3-year government bond trends," and added, "I do not think it is yet the stage to consider raising the base interest rate in response to market interest rate increases." While there is optimism about economic recovery, the BOK intends to maintain its accommodative monetary policy as COVID-19 is still ongoing.

Below is a Q&A session with Deputy Governor Park and Director Lee Sang-hyung of the Monetary Policy Bureau.

- This year, various uncertainties such as vaccines, trade wars, and financial imbalances are mentioned. Is the BOK's growth forecast of 3.0% overly optimistic?

▲ The domestic economy is expected to continue a moderate recovery trend similar to the global economy. Exports are showing a pattern of rising in the first half and falling in the second half, maintaining the recovery momentum, and are expected to increase significantly compared to last year, so I do not think the forecast is overly optimistic. The Organisation for Economic Co-operation and Development (OECD) recently revised Korea's growth forecast upward to 3.3%.

- Recently, inflation has been driven more by supply-side factors than demand, leading to criticism of it being 'bad inflation.' How does the BOK evaluate this?

▲ While recent inflation has been influenced by supply shortages such as rising oil prices, there is also an effect from demand recovery as the economy improves. I believe it is a result of a combination of demand and supply factors. Rather than distinguishing between good and bad inflation, it is more appropriate to view the current inflation as a result of economic activity improvement.

▲ The February consumer price increase was significantly affected by rising food prices due to adverse weather conditions and the recent spread of avian influenza (AI). Such inflationary pressure is unlikely to persist. The Research Department recently forecasted this year's inflation rate at 1.3%, reflecting economic improvement. (Lee Jung-ik, Head of Price Trends Team)

- You assessed that the possibility of a rapid inflation surge is limited. Does this assessment include the global situation?

▲ Yes. Globally, rapid inflation is unlikely because the economic recovery is moderate and employment conditions are unlikely to improve quickly. The advancement of IT technology, leading to rapid automation and unmanned processes, is also a factor that restrains inflationary pressure.

- You explained that 71% of the housing price increase is due to domestic factors and mentioned supply shortages as a cause.

▲ There are concerns about supply, but one reason for the reduced supply was demand influence. Last year, housing prices rose sharply, increasing expectations for further price rises, which led to fewer properties being put on the market. The reduction in unsold housing units last year also indicates strong demand for new housing.

▲ The analysis that 71% is due to domestic special factors is based on average data from 2006 to mid-2020. We should be cautious about concluding that supply was insufficient only last year. (Director Lee Sang-hyung)

- Is there a possibility that the scale of government bond purchases in the first half will be larger than expected? Besides raising the base interest rate, what other measures are available to respond to inflation?

▲ Depending on market conditions, in addition to the planned 5 to 7 trillion won government bond purchases, one-time purchases may be conducted. Inflation response measures include adjusting the base interest rate and liquidity management through asset purchases. However, the possibility of sustained and excessive inflation expansion is still considered low.

- Is there a need to continue operating the Special Purpose Vehicle (SPV) for corporate bonds and commercial paper (CP) purchases?

▲ Currently, it has been announced that the operation will be extended for six months. While conditions for high-quality corporate bonds have improved significantly, conditions for non-investment grade bonds are still insufficient, so the operation was extended. Since then, market conditions for non-investment grade bonds have also improved. We will monitor changes before the SPV's scheduled end in mid-July and respond accordingly. (Director Lee Sang-hyung)

- Both long-term and short- and medium-term interest rates are rising. How do you evaluate this? Given the widening gap between short- and long-term rates, should the base interest rate be raised to reflect the market interest rate increase?

▲ We are closely monitoring the 3-year government bond rate and taking market stabilization measures. However, I do not think it is yet the stage to consider raising the base interest rate in response to market interest rate increases. Since the economy is still in the recovery phase, the accommodative stance should be maintained. However, as always, we will be cautious about the possibility of worsening financial imbalances while maintaining the accommodative policy.

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