1. Central banks’ open market operations (OMO) have evolved in various ways in response to changes in the financial and economic conditions of each country, supporting efficient monetary policy. In response to the Global Financial Crisis (GFC) and the COVID-19 pandemic, central banks in major developed countries introduced unconventional monetary policies and adopted the floor system, which they are expected to maintain in the future. In contrast, Bank of Korea (BOK) responded to the GFC with significant rate cuts while maintaining the corridor system, and has continued efforts to enhance the effectiveness of this framework. This note evaluates the performance of BOK’s OMO to date and outlines directions for its future development.
2. BOK has adhered to three general principles in conducting OMO: effectiveness, efficiency, and reciprocity. Through OMO, BOK 1) effectively maintains the overnight call rate—the starting point of the monetary policy transmission channel—closely aligned with the Bank of Korea Base Rate, 2) avoids excessive intervention in the market to manage financial risks, and 3) interacts with the financial market to contribute to its stable development.
3. BOK has managed the overnight call rate by controlling the amount of the monetary base through various means, such as Monetary Stabilization Bonds (MSB) and reverse repo transactions. When concerns arise that market instability may spread throughout the financial system, BOK has implemented active market stabilization measures to support the rapid recovery of market functions.
4. Currently, BOK’s OMO faces changes in various financial and economic conditions. While demand for the monetary base is increasing due to economic expansion, the supply of liquidity from the foreign sector is stagnating. Furthermore, as non-bank financial institutions continue to increase their share of financial transactions, the volatility of the financial market is likely to rise. Uncertainty in demand for reserves is also expected to increase, given the greater possibility of large-scale deposit withdrawals resulting from the digitization of finance and the emergence of new payment and settlement methods.
5. In response to these changes, BOK intends to continue to operate the corridor system, which has contributed to the smooth transmission of monetary policy and the efficient functioning of the financial market, in a stable manner, while continuing efforts to improve it. In particular, BOK plans to introduce a demand-based liquidity supply scheme, such as periodic repo operations, to ensure that the demand for the monetary base in the economy is met at an appropriate level. Additionally, BOK will explore ways to make more constructive use of MSB, as it is not only an effective instrument for absorbing excess liquidity, but also a risk-free asset with high liquidity and stability.