South Korea urges caution on monetary policy shift from major economies

Reuters

SEOUL (Reuters) - South Korea on Wednesday cautioned major economies to consider the global ripple effects of any shift in their monetary policy stance, as emerging markets bore the brunt of the recent selloff in their currencies in the wake of the U.S. Federal Reserve's plan to trim its bond-buying stimulus.

"As discussions about U.S.'s exit strategy have intensified, concerns about greater volatility in global financial markets such as a rise in interest rates and market unrest have been raised," South Korea's presidential office said in a statement ahead of the G20 summit in Russia later this week.

"If a reserve currency country changes its monetary policy stance, it should consider not only its domestic economic conditions but the effects on the global economy," the statement said.

The comments come in the wake of the recent shakeout in emerging markets, particularly India and Indonesia, whose currencies have tanked on concerns of a flight of capital towards dollar-based assets once the Fed starts reducing its bond-buying programme.

"The U.S. Federal Reserve will start tapering its quantitative easing programme in September as it had planned, in the absence of any special events," Bank of Korea Governor Kim Choong-soo said at a meeting with the heads of small and medium-sized companies earlier on Wednesday.

South Korea has so far avoided any serious unrest in its markets, as foreign capital continued to seep in with the won rising 1.2 percent against the dollar last month even as some of its regional peers slumped to record lows.

Analysts point to the country's strong current account surplus, reduced dependence on short-term offshore debt and its growing foreign-exchange reserves as key differentiators for Asia's fourth-largest economy.

But local policymakers remain concerned about the country's growth prospects and its systemic stability should the Fed's tapering trigger a major capital flight from emerging markets.

The expected rise in borrowing costs once the Fed starts its tapering could also undercut growth for South Korea, as it struggles with subdued external demand and weak private consumption stemming from heavily leveraged household balance sheets.

The presidential office on Wednesday also urged emerging economies to conduct macroeconomic policy in a stable manner and adopt so-called macroprudential measures to guard against external shocks.

(Reporting by Se Young Lee; Editing by Shri Navaratnam)

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