"Rapid Execution of Liquidity Supply"... The Dilemma of the Monetary Policy Committee Remains a Challenge

Yoon "Rapid Market Stabilization Measures to Be Implemented Starting Today"
Government and Bank of Korea Respond Fully to Liquidity Crisis Triggered by Legoland
However, Additional Measures Limited Due to Monetary Policy Conflicts at FOMC
Raising Interest Rates While Supplying Liquidity... 'Dilemma'

Lee Chang-yong, Governor of the Bank of Korea, is explaining the base interest rate hike at a press conference held at the Bank of Korea in Jung-gu, Seoul, on the morning of the 12th. Photo by Joint Press Corps

The government and the Bank of Korea are set to implement market stabilization measures starting this week, following a flood of liquidity supply measures aimed at alleviating financial market instability triggered by the 'Legoland incident.' The government will begin supplying liquidity using the Bond Market Stabilization Fund from the 24th, and the Bank of Korea plans to decide on expanding eligible collateral securities at the Monetary Policy Committee meeting on the 27th.

However, there are concerns that these measures are only temporary fixes that are unlikely to have long-term effects, and that the Monetary Policy Committee faces a dilemma in making decisions that may conflict with existing monetary policies, leaving persistent elements of instability.

According to the government and the Bank of Korea, the liquidity supply measures exceeding 50 trillion won, decided at the emergency macroeconomic and financial meeting yesterday, will be partially implemented starting today. President Yoon Suk-yeol said on his way to the Yongsan Presidential Office, "We will swiftly execute large-scale market stabilization measures starting today," adding, "Above all, we believe this will greatly help alleviate funding difficulties for small and medium-sized enterprises."

First, the government will use 1.6 trillion won of idle funds from the 20 trillion won Bond Market Stabilization Fund to purchase maturing refinancing volumes of corporate bonds and commercial papers (CP). Additionally, the 3 trillion won that Korea Securities Finance Corporation decided to provide as additional support to securities firms facing difficulties in securing funds will be promptly executed through repurchase agreement (RP) transactions and securities-backed loans, possibly starting today.

The Bank of Korea will also consider including public institution bonds and bank bonds in the eligible collateral securities at the Monetary Policy Committee meeting on the 27th. Currently, banks provide only government bonds, monetary stabilization bonds, and government-guaranteed bonds as collateral when borrowing from the Bank of Korea. If the eligible collateral securities are expanded, banks will be able to use bank bonds they already hold as loan collateral, easing funding pressures.

Furthermore, the Monetary Policy Committee has expressed that it will consider reactivating the Corporate Liquidity Support Special Purpose Vehicle (SPV) or special financial stability loans if necessary. Although the Monetary Policy Committee meetings, which are not the usual monetary policy direction meetings that set the base interest rate, typically do not attract much market attention, recent liquidity crises have heightened the importance of the Bank of Korea's role, drawing increased focus even on these non-monetary policy meetings.

However, the market has mixed views on these measures, with some calling it "the most extensive support since the Yoon Suk-yeol administration took office," while others criticize it as merely a "temporary fix." In particular, since the Bank of Korea is still maintaining a rate-hiking stance, there is widespread skepticism that measures requiring Monetary Policy Committee approval, such as reactivating the SPV, will be practically difficult to implement. Gong Dong-rak, a researcher at Daishin Securities, said, "Conflicting issues are inevitable going forward," adding, "From the Bank of Korea's perspective, which is conducting monetary tightening, accepting measures like the SPV will not be easy."

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