Korea
Korea[₩]
Institutional framework
The Bank of Korea Act stipulates the goal of monetary policy as follows: "The Bank shall contribute to the sound development of the national economy through ensuring price stability, while giving due consideration to financial stability in carrying out its monetary policy.
The Bank of Korea maintains a flexible inflation targeting system to effectively achieve price stability, which is the primary objective of monetary policy. The inflation target is currently set at 2.0% in terms of consumer price inflation (year-on-year). In ensuring price stability over the medium-term, the Bank pays careful attention to the impact of monetary policy on financial stability.
The Monetary Policy Board, the supreme policy-setting body of the Bank of Korea, deliberates and decides Korean monetary policy at the highest level. The Monetary Policy Board is made up of seven members, including the Governor and the Senior Deputy Governor of the Bank of Korea. The decisions made at its meetings are adopted through a simple majority with at least five members in attendance, unless otherwise specified. The meetings to determine the direction of monetary policy, mainly setting the Base Rate, are hosted eight times a year. After the meeting, a press release is made available and the Governor of the Bank of Korea holds a press conference to explain the details of and the background to the decision. The minutes detailing the discussions during the meeting are made public after two weeks.
Key features of the monetary policy implementation framework
The Bank of Korea adopts an interest rate-oriented monetary policy operation. Thus, the Bank determines its policy rate, the Bank of Korea Base Rate, and maintains the overnight call rate closely aligned with the policy rate using its policy instruments. The Base Rate is the reference rate applied in transactions such as RPs between the Bank of Korea and its financial institution counterparts, functioning both as the fixed rate for its sales of securities to absorb excess liquidity and as the minimum tender rate for its purchases to provide liquidity. The Bank uses open market operations, lending and deposit facilities, and a reserve requirement system as policy instruments.
The Bank of Korea predicts the supply of reserves, compares it with the demand for reserves, and calculates the amount of reserve surplus or deficit. If a deficit is expected, the Bank of Korea will inject liquidity, and if a surplus is expected, it will absorb liquidity. In this way, it conducts open market operations so that call rates do not deviate significantly from the Base Rate. The main instruments of open market operations include the issuance of Monetary Stabilisation Bonds (MSBs), transactions of securities, and deposits with the Monetary Stabilisation Account (MSA). MSBs have relatively long maturities. Thus, they are used as a major structural adjustment tool with long-lasting policy effects. Securities transactions are used to supply or withdraw funds by buying or selling government and public bonds. Eligible securities are confined to government bonds, government-guaranteed bonds, MSBs, and mortgage backed securities (MBSs) issued by the Korea Housing-Finance Corporation. However, if necessary, certain bonds specified by the Monetary Policy Board can be included. While securities transactions consist of outright transactions and RP transactions, most of them are RP transactions. The longest RP maturity is 91 days, but the majority of RP transactions involve seven-day RPs. The MSA, a term-based deposit facility, is one of the open market operation instruments that the Bank of Korea uses to control short-term liquidity.
Currently, the lending and deposit facilities at the Bank of Korea that are available to financial institutions consist of Liquidity Adjustment Loans and Deposits, the Bank Intermediated Lending Support Facility, Intraday Overdrafts, and Special Loans. Liquidity Adjustment Loans and Deposits, which are standing facilities, constrain excessive volatility of money market interest rates by enabling financial institutions to borrow shortage funds from the central bank or to deposit surplus funds at an interest rate level within a certain margin above or below the Base Rate. Interest rates applied to those facilities are the Bank of Korea Base Rate±100bp. Liquidity Adjustment Loans and Deposits carry overnight maturities. The Bank Intermediated Lending Support Facility is a lending system operated by the Bank of Korea to support financial institutions' lending to SMEs. The Bank of Korea provides low-interest rate funds, within certain ceilings, to financial institutions based on their performance in extending loans to SMEs. The interest rates for these programs are usually lower than the Base Rate and their maturities are one month. Intraday Overdrafts are facilities to extend financial support to banks experiencing transient shortages of settlement funds in the course of a day. They should be redeemed before the close of business that day. Special loans are those that the Bank of Korea extends as the lender of last resort in order to secure financial market stability, after obtaining special approval from the Monetary Policy Board. Their rates and maturities are determined in each case.
With regard to the reserve requirement system, the Bank of Korea Act stipulates that financial institutions hold a certain ratio of their liabilities subject to reserve requirements in their accounts with the central bank. The reserve requirement ratio on time deposits, time installment deposits, mutual installment savings for non-payment accounts, installments for home buying, and CDs is 2%, and that on other deposits is 7%. The reserve calculation period is from the first day to the last day of every month, and the reserve maintenance period is from the Thursday of the second week of the following month to the Wednesday of the second week of the month after the following month. In principle, no interest payments are made on reserve deposits with the central bank. However, if necessary, reserve deposits can be remunerated, as determined by the Monetary Policy Board.
Institutional setup of monetary policy decisions and operations
Policy decision body, size and composition | Monetary Policy Board |
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Major mandates | |
Decision-making process | |
Frequency / length of meetings | 8 times a year |
Frequency of announcements | Same |
Main policy target | Base rate |
Overview of key features
Key policy rate | Base rate (RP and Reverse RP rate) |
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maturity (days) | 7 |
Operating target | O/N call rate |
maturity (days) | 1 |
Standing facilities | Lending, deposit |
Corridor width (bp) | 200 |
Reserve requirements | Yes |
maintenance period | 1 month |
Main operation | MSBs / RRP / MSA |
functions | |
maturity (days) | |
regular interval | |
frequency | |
Overall frequency | ≈2 x w |
Discretion left to operational desk | Choice of instruments, size and timing of operations |
Key policy signals via | |
announcement | √ |
keynote tender | √ |
standing facility | √ |
other | √ |
Monetary policy communication
Explicit use of forward guidance | No |
---|---|
Timing / media of policy announcement | On day of board meeting; central bank website |
Policy announcement and documents | Base Rate |
Explaining policy decisions | Detailed press release / press conference |
Dissemination of minutes (timing / media) | Yes. Approximately two weeks after board meeting |
Content of minutes | Description of economic and financial conditions and the policy consideration. |
Publication of forecasts | Yes (quarterly) |
Publication of projected path of policy rate | No |
Reserve requirements: ratios and size
Main functions served | Liquidity management |
---|---|
Domestic currency | 0–7% |
Foreign currency | 1–7% |
Average | 4.2% |
Required reserves | KRW 52.6 trn |
Required reserve as % of GDP | 2.80% |
Actual reserves | KRW 52.9 trn |
Actual reserve as % of GDP | 2.81% |
Main features of reserve requirements
Averaging | Y |
---|---|
Carry-over | N |
Type | Lagged |
Maintenance period | 1 month |
end (day) | 2nd Wed |
Calculation period | 1 month |
end (day) | end-month |
Lag before maintenance | 5–11 days |
Vault cash | Y |
restrictions | Y |
Remuneration | N |
average rate | |
marginal rate | |
Framework last changed | 12/11 |
Liquidity position and forecasting
Structural Position | Surplus |
---|---|
Most volatile factor(s) | Government sector flows |
Most unpredictable factor(s) | Government sector flows |
Forecast horizon(s) | 1 month |
Frequency | Daily |
Frequency of revision | Daily |
Forecast published? | No |
Standing facilities: lending / market ceiling
Name | Liquidity adjustment loans |
---|---|
Form | Loan |
Pricing method | Base rate + 100 bps |
Maturity | 1 day |
Access limited by/to | Eligible collateral; reserve depository institutions |
Function(s) | Limit interest rate volatility |
Standing facilities: deposit / market floor
Name | Liquidity adjustment deposits |
---|---|
Form | Deposit |
Pricing method | Base rate – 100 bps |
Maturity | 1 day |
Access limited by/to | Reserve depository institutions |
Function(s) | Limit interest rate volatility |
Open market operations: repo or reverse repo
Name/Type | (i) RRP (ii) Fine-tuning RP or RRP |
---|---|
Maturity | (i) Mainly 7 days (ii) Varies |
Frequency | (i) Weekly (ii) As needed |
Pricing method | Auction |
Access limited by/to | Banks and investment & securities companies selected as eligible counterparties |
Function(s) | (i) Liquidity management (ii) Liquidity management |
Open market operations: central bank bills
Name | Monetary Stabilisation Bond |
---|---|
Total issuance | KRW 171.1trn |
Maturity | 91-day, 182-day, 1-year, 2-year |
Restrictions on possible maturities | Up to 2-year |
Pricing method | Auction |
Access limited by/to | Banks and investment & securities companies selected as eligible counterparties |
Discretion left to operational desk | Choice of size and timing of operations |
Open market operations: FX swaps
Maturity | N/A |
---|---|
Frequency | N/A |
Pricing method | N/A |
Access limited by/to | N/A |
Function(s) | N/A |
Other significant liquidity management means
Name/Type | (i) Monetary Stabilisation Account (ii) OT (iii) Securities lending /borrowing |
---|---|
Form | (i) Term deposit |
Frequency | (i) Weekly (ii) As needed (iii) As needed |
Maturity | (i) Mainly 28-day (ii) Varies (iii) Varies |
Pricing Method | (i) Auction (ii) Auction (iii) Auction |
Access limited by/to | (i) Banks selected as eligible RP counterparties (ii) Banks and investment & securities companies selected as eligible counterparties (iii) Banks and investment & securities and life insurance companies selected as eligible counterparties |
Function(s) | (i) Liquidity management (ii) Liquidity management (iii) Liquidity management |
Settlement systems and intra-day liquidity facilities
Settlement system | RTGS, since 1994 Hybrid, since 2009 |
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Intra-day liquidity facility | (i) Collateralised intra-day overdraft (ii) Intra-day repo |
Charge | (i) No charge unless the intra-day credit amount is more than 25% of financial institution’s equity capital (ii) No charge |
Foreign currency settlement system | No |
CLS participation by banks | Yes |
Other settlement system(s) | N/A |
Collateral
Standing facilities: List of eligible collateral | Credit securities including bills acquired by financial institutions through lending. The remaining maturities of the credit securities must be reached within one year of their acquisition by the BOK. Bonds issued by government or bonds whose principal and interest are guaranteed by government. Monetary stabilisation bonds (MSBs) |
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Standing facilities: Discretion of central bank on collateral | Monetary Policy Board decides collateral types for standing facilities, if necessary |
Open market operations: List of eligible collateral | Treasury securities, Government-guaranteed securities, MSBs only applicable to repo (liquidity supply) |
Open market operations: Discretion of central bank on collateral | Monetary Policy Board decides collateral types for OMOs if necessary |
Dissemination of operational information: liquidity forecast
Forecast published? | No |
---|---|
Channel(s) | |
Timing | |
Remarks |
Dissemination of operational information: open market operations
Volume and price published? | Yes |
---|---|
Channel(s) | Electronic tender system in BOK-wire, BOK Website, Reuters, K-Bond |
Timing | Immediately upon finishing operations |
Dissemination of operational information: standing facilities
Lending facility usage: Channel(s) | Not published |
---|---|
Lending facility usage: Timing | |
Deposit facility usage: Channel(s) | Not published |
Deposit facility usage: Timing |
Other information dissemination
Type | FX intervention |
---|---|
Channel(s) | Bank of Korea website |
Timing | Semi-annual |