First unlimited repo exercise hits all the bids

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First unlimited repo exercise hits all the bids

The Bank of Korea released 5.25 trillion won ($4.27 billion) into the economy Thursday through repurchase agreements with banks and securities companies.

In the auction, 91-day funding was released at 0.78 percent, 0.03 percentage points higher than the current policy rate. All bids lodged were accepted.

Korea’s central bank has promised unlimited weekly bond purchases, a deal never before been offered by Korean monetary authorities - not even during the financial crises of 1997 and 2008.

The repurchase agreement, or repo, auctions were announced on March 26 and will continue for three months. They are aimed at supporting the economy, which has been hit by the effects of the coronavirus.

In a repo, financial instruments are sold and later bought back at a slightly higher price. They are essentially a form of collateralized borrowing.

The bank explained the price will be set between the base rate of 0.75 percent and 0.85 percent. If the repo rate is set below 0.75 percent, financial institutions in Korea might use the facility for arbitrage, raising funds through repos and then earning a higher rate of interest on those funds.

It could also signal to the market a future rate cut. Depending on the state of the economy, the central bank may continue with the repos after the end of June.

BY JIN EUN-SOO [jin.eunsoo@joongang.co.kr]

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