Market unresponsive to BOK's move for quantitative easing

Bank of Korea's Senior Deputy Governor Yoon Myun-shik speaks in a press conference at its headquarters in Seoul, Thursday. Yonhap

By Lee Min-hyung

• Published Mar 27, 2020 4:38 PM KST
• Updated Mar 28, 2020 9:19 AM KST

By Lee Min-hyung

The nation's short-term money market has remained volatile despite the Bank of Korea (BOK)'s unprecedented decision to funnel “limitless” cash into financial institutions.

Following the announcement, the three-month commercial paper interest rate surged to 2.04 percent as of Thursday, up 0.17 percentage points from the previous day, according to the Korea Financial Investment Association.

This was the first time since March 2015 that the rate topped the 2-percent mark.

The increase stemmed from market concerns over the timeline of the central bank's planned injection of liquidity into the market. Under the move, the BOK will start supplying unlimited liquidity to financial firms for the next three months from April by purchasing bonds via a repo program.

Experts said the short-term uncertainty would be prevalent in the money market for the next few days until the measure takes effect next month.

“Despite the policy announcement, the liquidity crunch in the short-term money market stays in place, as the step does not work at all until the end of March,” Samsung Securities senior analyst Kim Eun-ki said.

Enhancing liquidity at the end of this month is particularly crucial in that cash outflow is frequent at the end of each quarter, according to him.

The economist went on to say, however, it remains to be seen whether the ongoing crunch will escalate into a credit crisis.

“This will depend on how much the BOK's policy helps alleviate the short-term money market in early April,” he said. “We need to wait and see how the rate changes next month to determine the recent rate hike was driven by the seasonal factor.”

Regarding the near-term concern, the BOK's Senior Deputy Governor Yoon Myun-shik said the central bank would enhance the monitoring of any unusual signs before the introduction of the policy next month.

“The central bank will do its best to stop the market condition from worsening further by paying close attention to the period,” Yoon said. “As far as we know, other financial organizations and commercial banks will keep making efforts to supply liquidity in the market until the end of March,” he said Thursday in a press conference.

An official from the BOK also underlined that the central bank has already taken a series of steps to expand market liquidity and they will help to minimize the current market volatility.

“Against the backdrop, we have recently taken a series of measures, such as the $60 billion currency swap deal between Korea and the U.S.,” the official said. “By teaming up with other relevant financial authorities, we will take steps to minimize the lingering concern.”

Local lenders remained optimistic over the introduction of the de facto full-scale quantitative easing.

“In case the liquidity expands in the market, this is expected to bring a positive impact on banks' liquidity financing,” an official from one of the major lenders here said. “But for now, it has not generated any direct and tangible outcomes. Banking players have little to do with the BOK's recent move, as securities firms will be the most active players taking part in the repo auction.”

Financial authorities here decided to provide support to brokerage houses first, as they are suffering the biggest setbacks among financial players in the money market.

In recent weeks, foreign investors have gone on a massive selling spree of Korean stocks amid the growing sense of economic uncertainty here. The mass exodus of foreign capital also raised concerns over the shortage of dollar liquidity.

Along with the latest step by the central bank, the government is going all-out to tackle the ongoing financial malaise induced by the spread of the coronavirus. With COVID-19 spreading across the West, including Europe and the United States, local stock and bond markets have shown signs of wide fluctuation.

The benchmark KOSPI rarely fell below the symbolic 2,000 mark for the past three years. But starting this March, the index has been on a steep decline even falling below 1,500 points due to the selling binge. Even if the figure recovered to around the 1,700 mark as of Friday, uncertainties remain in place over its possible plunge, as the global spread of the coronavirus keeps posing a negative growth outlook for export-driven local companies.

On Tuesday, the government announced market stabilization packet worth 100 trillion won. Considering the ongoing liquidity concern in the local securities market, Ministry of Economy and Finance decided to provide 48.5 trillion won out of the emergency fund to use for stabilizing stocks and bond markets.