Bank of Korea Updates Open Market Operations for Enhanced Flexibility

Based on a June 26 Bloomberg report, the South Korea central bank will update its open market operation framework. This change will include scheduled buying and selling of repurchase agreements, or repos, on fixed days. Beginning on July 10, the new structure replaces the previous model, which primarily used repo sales to withdraw excess liquidity. Under the revised system, 14-day repo purchases will occur every Tuesday. Before this change, the Bank of Korea held 7-day repo sales every Thursday, while repo buys were made irregularly. The updates are aimed at establishing a more stable and predictable framework for managing liquidity in the domestic financial system.

Liquidity Shift Drives Changes to South Korea’s Monetary Tools

The shift comes amid changing conditions in South Korea’s financial landscape, particularly in external economic flows. The South Korea central bank cited declining current account surpluses and rising outbound investments as key influences. These changes have reduced steady inflows of foreign capital into the domestic market. As a result, there is less liquidity available and greater uncertainty in short-term funding demands. The revised framework intends to help the central bank address these new dynamics more efficiently and with better timing.

A central goal of the reform is to better control short-term market interest rates amid rising volatility. According to the bank, the updated open market operation framework allows for quicker responses to rate fluctuations. Gong Dae-heui, who heads the BOK’s open market operations team, described current volatility as a primary concern. He stated, “At a fundamental level, the main issue is the structural decline in the need for liquidity absorption.” The bank hopes that more balanced repo transactions will reduce these market pressures and help stabilize short-term borrowing costs.

Open Market Operations Remain Core Tool for Interest Rate Control

Open market operations remain the BOK’s main tool for managing liquidity and setting short-term rates. These operations include the sale and purchase of government and policy bank bonds with financial institutions. The aim is to keep the overnight call rate close to the central bank’s target rate. The other liquidity tools are the issuance of Monetary Stabilization Bonds and commercial deposit management through the Monetary Stabilization Account. The bank uses these tools to ensure a consistent flow of money in the financial system.

Expanded Collateral List to Support Revised Repo Structure

To support the new schedule of repo purchases, the BOK will expand acceptable collateral options. Besides government and government-guaranteed bonds, it will now include securities from three major policy banks. These institutions are the Korea Development Bank, Industrial Bank of Korea, and Export-Import Bank of Korea. The expansion gives financial institutions more flexibility when participating in repo operations. This update enhances the overall efficiency of transactions under the revised operational structure.

Revised Participation Rules and Incentives Set for August Implementation

The central bank will also revise eligibility requirements for institutions involved in its operations starting in August. These new rules aim to broaden participation and ensure smoother functioning of the market framework. The South Korea central bank mentioned changes will be made to its incentive system, though details are not yet available. These changes in the pipeline show a shift to help more stable money market operations. They are part of a larger scheme for maintaining monetary control in an evolving financial environment.