Central bank issues new warning

The central bank governor warned on Tuesday that the country should brace for the unexpected consequences of major economies moving toward monetary tightening.

The comment came as the United States and the Euro bloc are phasing out their stimulus measures, underpinned by interest rate cuts and quantitative easing.

“The Bank of Korea plans to respond accordingly by monitoring these trends in monetary policies and global capital movements,” said Lee Ju-yeol, governor of the Bank of Korea, during a meeting with economic and trade experts.

The central bank has set the country’s key interest rate at a record low of 1.25 percent as part of its efforts to accommodate economic growth. However, the chief indicated last month that this stance could be overturned should the economy continue to recover.

The governor also shared the results of the overseas meeting he attended last week, the Bank for International Settlements (BIS) in Switzerland and the European Central Bank (ECB) forum in Portugal, where ECB President Mario Draghi hinted that the bank might start winding down its stimulus as the European economy keeps growing.

“Such policy changes could lead to unexpected effects on emerging economies since a great deal of liquidity will start shrinking,” Lee said during Tuesday’s meeting.

And yet he reaffirmed that the shift in monetary stance will not trigger large-scale economic instability.

“Governors of emerging economies agreed that countries could overcome the normalization process,” Lee continued, “should it take place gradually in a planned manner.”

Amid the changes, the Bank of Korea is scheduled to determine its key interest rate on July 13.

Many analysts believe that the central bank would not rush to an interest rate hike due to the expected burdens of debt holders, but a rise could come in the latter half of this year or early next year.

Alongside the monetary policy issue, the meeting participants also raised the need to enhance competitiveness in emerging high-tech segments such as artificial intelligence to back long-term economic growth.

BY PARK EUN-JEE [park.eunjee@joongang.co.kr]