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
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)
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
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)
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