BOK warns of capital inflows from Fed’s QE3

Korea’s top central banker has stressed the need to smooth the volatility of cross-border capital flows as emerging countries cannot block liquidity inflows stemming from advanced economies’ monetary easing steps.

Central banks in the U.S. and the euro zone announced in September moves to take unconventional monetary easing steps in a bid to prop up their fragile economies, dogged by the euro zone debt crisis.

The Federal Reserve pledged Thursday to pump $40 billion every month into the U.S. economy by buying mortgage-backed securities in its so-called third round of quantitative easing (QE3).

“[Inflows of] such global liquidity are expected to lead to huge difficulty in managing capital flows,” Bank of Korea gov. Kim Choong-soo said in a meeting with reporters on Friday.

“We cannot block liquidity inflows, so it is very important for us to control the volatility of such liquidity to some degree,” Kim added.

The central bank last week froze the nation’s key borrowing rate at 3 percent for the second consecutive months after shaving off 0.25 percentage point in July.

Liquidity to be unleashed is expected to make its way into emerging countries, raising concerns the flood of capital inflow will raise the risks of inflation and strengthen currencies as the global economy slows.

Kim said there are views about the “negative spillover effect” on emerging countries, prompting some of such nations to adopt steps to stem excessive cross-border capital movement.

“Korea has taken a set of macro-prudential measures in the area of foreign exchange. It remains to be seen what effect such steps will produce, but for now, it can be said they are working,” the governor added.

Kim referred to measures to ease excessive cross-border capital flows and reduce short-term foreign debt, including bank levies and tighter regulations on banks’ foreign exchange derivatives positions.

Korean Finance Minister Bahk Jae-wan said in an interview with Chinese media outlets that the Fed’s QE3 is likely to have a positive impact on the Korean economy as the move will shore up the recovery of the global economy.

Bahk added it is feared that the stimulus measures may push up commodity prices and spark excessive foreign capital inflows to Asia’s fourth-largest economy.

Yonhap