Korea
Korea[KRW]
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 on the first Tuesday two weeks after the Board meeting.
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(MPB) 1 |
|---|---|
| Major mandates 2 | (i) Price stability(BOK sets a price stabiltiy target in consultation with the government) (ii) Financial stability 3 |
| Decision-making process | Various unofficial meetings of working-level staff of the various BOK departments concerned are held during the week before the main meeting, and a ‘trends briefing meeting’ is held the day before it. At this particular meeting, the various departments provide overall briefings on domestic and overseas financial and economic conditions to the Monetary Policy Board members, after which discussion among the members takes place. The main meeting usually starts at 9 a.m. the next day, and the Base Rate is decided and the statement on the ’Monetary Policy Decision’ is written during it. Meanwhile, the Monetary Policy Board applies a look-at-everything approach, taking into overall account domestic price movements, the economy, financial and foreign exchange market conditions, changes in the trend of the world economy, etc. |
| Frequency / length of meetings | 8 times a year 4 |
| Frequency of announcements | Same 5 |
| Main policy target | Base rate 6 |
Overview of key features
| Key policy rate | Base rate (RP and Reverse RP rate) |
|---|---|
| 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 7 | MSBs / RRP / MSA 8 |
| functions | Keeping the O/N call rate from deviating sharply from the Base Rate (Liquidity Management) |
| maturity (days) | MSBs: 14 d to 3 yrs MSAs:1-91 days RRP: 1-91 days |
| regular interval | Yes |
| frequency | 2 x w / 1 x w / 1 x w |
| Overall frequency | 4 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 | Yes 9 |
|---|---|
| Timing / media of policy announcement | On day of board meeting; Bank of Korea website |
| Policy announcement and documents | Monetary Policy Decision |
| Explaining policy decisions | Detailed press release / press conference 10 |
| Dissemination of minutes (timing / media) | Yes. Approximately two weeks after board meeting / Bank of Korea website 11 |
| Content of minutes | Description of economic and financial conditions and the policy consideration. |
| Publication of forecasts 12 | Yes (quarterly) |
| Publication of projected path of policy rate 13 | No |
Reserve requirements: ratios and size
| Main functions served | Liquidity management 14 |
|---|---|
| Domestic currency | 0–7% 15 |
| Foreign currency | 1–7% |
| Average | 5.1% 16 |
| Required reserves | KRW 101.7 trn 17 |
| Required reserve as % of GDP | 4.91% 18 |
| Actual reserves | KRW 105.9 trn 19 |
| Actual reserve as % of GDP | 5.11% 20 |
Main features of reserve requirements
| Averaging | Y |
|---|---|
| Carry-over | N |
| Type | Lagged |
| Maintenance period | 1 month 21 |
| end (day) | Wednesday of the second week |
| Calculation period | 1 month 22 |
| end (day) | end-month |
| Lag before maintenance | 5–11 days |
| Vault cash | Y |
| restrictions | Y 23 |
| Remuneration | N 24 |
| average rate | |
| marginal rate | |
| Framework last changed | 12/2011 |
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 25 |
| Maturity | 1 day 26 |
| 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 27 |
| 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 28 | (i) basically, RRP (ii) Fine-tuning RP or RRP if necessary |
|---|---|
| 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 etc. selected as eligible counterparties |
| Function(s) | (i) Keeping the O/N call rate from deviating sharply from the Base Rate (Liquidity Management) (ii) Keeping the O/N call rate from deviating sharply from the Base Rate (Liquidity Management) |
Open market operations: central bank bills
| Name | Monetary Stabilisation Bond |
|---|---|
| Total issuance | KRW 121.8 trn 29 |
| Maturity | 91-day, 1-year, 2-year, 3-year |
| Restrictions on possible maturities | Up to 3-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 30 | (i) Monetary Stabilisation Account (ii) OT (iii) Securities lending /borrowing 31 |
|---|---|
| Form | (i) Term deposit (ii) Securities transaction (iii) Securities transaction |
| 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) Keeping the O/N call rate from deviating sharply from the Base Rate (Liquidity Management) (ii) Securing Collateral for RRP, Market Stability Measures (iii) Market Stability Measures / Securing Collateral for RRP |
Settlement systems and intra-day liquidity facilities
| Settlement system | RTGS, since 1994 32 |
|---|---|
| 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 | 1.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. 2. Bonds issued by government or bonds whose principal and interest are guaranteed by government. 3. Monetary stabilisation bonds (MSBs). 4. Debentures issued by the Korea Development Bank. 5. Debentures issued by the Industrial Bank of Korea. 6. Debentures issued by the Export-Import Bank of Korea. 7. MBSs issued by the Korea Housing Finance Corporation. 33 |
|---|---|
| Standing facilities: Discretion of central bank on collateral 34 | Monetary Policy Board adjusts collateral types for standing facilities, if necessary. |
| Open market operations: List of eligible collateral | 1. Treasury securities. 2. Government-guaranteed securities. 3. Monetary stabilisation bonds (MSBs),only applicable RP(liquidity supply). 4. MBSs issued by the Korea Housing Finance Corporation. |
| Open market operations: Discretion of central bank on collateral 35 | Monetary Policy Board adjusts collateral types for OMOs if necessary. 36 |
Dissemination of operational information: liquidity forecast
| Forecast published? | No |
|---|---|
| Channel(s) | N/A |
| Timing | N/A |
| Remarks | N/A |
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 | Not published |
| Deposit facility usage: Channel(s) | Not published |
| Deposit facility usage: Timing | Not published |
Other information dissemination
| Type | FX intervention |
|---|---|
| Channel(s) | Bank of Korea website |
| Timing | Quarterly |
1 The Monetary Policy Board is composed of seven members representing various groups in the national economy :
1) the Governor, ex-officio;
2) the Senior Deputy Governor, ex-officio;
3) one member recommended by the Minister of Strategy and Finance;
4) one member recommended by the Governor of the Bank of Korea;
5) one member recommended by the Chairman of the Financial Services Commission;
6) one member recommended by the Chairman of the Korea Chamber of Commerce and Industry;
7) one member recommended by the Chairman of the Korea Federation of Banks.
2 Describe as well the legal status of the mandate and involvement of government
3 Bank of Korea ACT
Article 1 (Purpose)
(1) The purpose of this Act shall be to establish the Bank of Korea and to contribute to the sound development of the national economy by pursuing price stability through the formulation and implementation of efficient monetary and credit policies.
(2) The Bank of Korea shall pay attention to financial stability in carrying out its monetary and credit policies.
4 The dates of the Monetary Policy Board meetings for monetary policy decision-making (i.e. regarding the Base Rate) for the next year are set and released near the end of the current year. However, if a policy response is needed due to rapid changes in economic conditions, the Board will hold extraordinary meetings.
5 After the MPB 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.
6 The Base rate is the reference rate applied in transactions between the BOK and financial institutions such as repurchase agreements (RPs and Reverse RPs), the Bank’s lending and deposit facilities, etc.
The Bank of Korea uses the Base Rate as a fixed bid rate for its sales of 7-day RPs and as the minimum bid rate for its purchases of 7-day RPs. The interest rates of liquidity adjustment deposits and loans are 100bp below and above the Base Rate, respectively.
7 RP = reversed purchase (repo, inject liquidity), RS=RRP=reversed sale (reverse repo, absorb liquidity), RT=reversed transaction (repo or reverse repo).
8 MSBs: Monetary Stabilisation Bonds, issued by BoK, used as a structural adjustment tool whose policy effects are long lasting;
MSA: Monetary Stabilisation Account, introduced in October 2010, is a market-friendly term deposit facility. It is mainly used to fine-tune the reserve levels and to cope with unexpected changes in reserve supply and demand.
9 Since July 2022, the Bank of Korea started to extend the scope of its communication and signalling about future course of monetary policy.
10 Immediately after the main meeting, the Governor of the Bank of Korea holds a press conference to explain the detailed background to the board's Monetary policy decision.
11 The minutes, recording the details of the discussions during the main meeting, are released two weeks after the meeting
12 For instance, economic and inflation forecasts related to policy decision.
13 If applicable, describe the publication of any fan-charts or uncertainty bands around the forecasts/projections.
14 The central bank can adjust liquidity in the markets and promote financial stability by changing financial institutions' funding situation through adjustment of the reserve requirement ratios
15 The financial institutions subject to the current reserve requirement regime include commercial banks and specialized banks. These institutions are required to maintain reserves corresponding to their reserve requirement ratios differentiated within a rage between 0~7% depending upon their deposit liability types.
(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 MPB may determine reserve requirement ratios within a range not exceeding 50% for different types or scales of liabilities subject to reserve requirements. In periods of pronounced monetary expansion, however, the MPB may impose marginal reserve requirements of up to 100% against any increase in liabilities subject to reserve requirements above the amount outstanding as of the date specified, thus making financial institutions maintain additional required reserves.
16 As of June 2022.
17 As of June 2022.
18 As of June 2022. GDP as of 2021.
19 As of June 2022. Cash in vaults plus Deposits at BOK.
20 As of June 2022. GDP as of 2021.
21 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.
22 The reserve calculation period is from the first day to the last day of every month.
23 Up to 35% of required reserves.
24 No interest payments are made on reserve deposits with the central bank. However, if necessary, reserve deposits can be remunerated, as determined by the MPB.
25 When the Base rate is less than 1%, it is calculated as twice the Base rate.
The MPB may adjust the interest rates for loans to the level of the Base rate, if deemed necessary to facilitate the functioning of the financial market.
26 The MBP may extend the loan period for Liquidity-adjusted loans within the range of one month, if deemed necessary to facilitate the functioning of the financial market.
27 The lower bound is 0%
The MPB may adjust the interest rates for deposits to the level of the Base rate, if deemed necessary to facilitate the functioning of the financial market.
28 RP=Reversed purchase (“repo”), RS=RRP=Reversed Sales (“reverse repo”), RT=Reversed transaction (RP or RRP).
29 As of end-of-August in 2022
30 OT = Outright Transaction, DB = Direct Borrowing, DL = Direct Lending.
31 Outright transactions are conducted only limitedly, since they are employed to provide or absorb liquidity permanently, and they therefore directly affect long-term market rates. For this reason, securities transactions focus mainly on RP transactions (mostly with 7-day maturities). Meanwhile, following the revision of the Bank of Korea Act in August 2011, the Bank can operate a securities lending and borrowing facility, which is enabling the Bank to not only enhance the efficiency of the liquidity management through flexible expansion of the volume of its RP sales, but also cope more effectively in the case of financial turmoil such as a credit crunch.
32 The BOK has operated a large-value payment system, BOK-Wire, since December 1994, with the aim of effectively satisfying the growing demand for large-value payments amid expansion of the nation’s economy and financial markets. BOK-Wire is a real-time gross settlement system providing funds transfers for short-term financial market transactions, securities settlement, foreign exchange settlement and net settlements arising from the retail payment systems. BOK-Wire was renamed BOK-Wire+ from April 2009, when a hybrid system was added to the old system to save participants' settlement liquidity through such features as a continuous bilateral and multilateral offsetting mechanism.
33 The Bank of Korea actively used various policy instruments to ensure economic and financial stability after the spread of COVID-19.
The MPB broadened the scope of eligible collaterals (4~7) for lending facilities to smoothly supply liquidity through loans to banks, if necessary.
34 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.
35 Discretion of the central bank to expand collateral types, and list of additional collateral types that the central bank can take on a discretionary basis. Also, additional information such as delays required if discretionary collateral changes.
36 In order to limit credit risk involved and to retain the efficiency of open market operations, securities eligible for use in transactions are confined to government bonds, government-guaranteed bonds, and securities specified by the MPB.