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More uncertain is how emerging nations can deal with low
growth
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QE, forward guidance could be tools for emerging central banks
(Change slug, adds quotes on emerging central bank policy
challenge)
By Leika Kihara
WASHINGTON, April 14 (Reuters) - Bank of Korea Governor
Rhee Chang-yong said on Friday the biggest challenge for
emerging market central banks could be to deal with a return of
secular stagnation and low interest rates, rather than
combatting higher inflation.
"In terms of our strategy in coping with higher inflation,
we're following the textbook," Rhee said in an International
Monetary Fund panel in Washington. "What we do not know is if we
are moving to a low inflation period ... secular stagnation and
the zero lower bound," he said.
Quantitative easing and forward guidance could be tools
emerging market central banks can use, as well as the idea of
setting a higher inflation target, Rhee said.
The fact advanced economies resorted to such unconventional
monetary tools allowed emerging economies to do the same without
being penalized by markets through an unwelcome depreciation of
their currencies, he said.
The bigger challenge could come when emerging markets alone
face secular stagnation and low inflation. The chance of this
happening is "not small," at least for some Asian economies like
South Korea facing a rapidly ageing population, he said.
"If you use quantitative easing and massive monetary
expansion, your exchange rate could come under speculative
attack," said Rhee, who was formerly director of the IMF's Asia
and Pacific Department.
On exchange rates, Rhee said last year's currency
intervention served as a "stabilizer" to rein in the won's sharp
depreciation against the dollar, rather than a replacement of
sound economic management.
In September and October last year, South Korean authorities
had to rely on currency intervention because the won fell much
more than expected on aggressive U.S. interest rate hikes, Rhee
told an IMF seminar.
"By slowing down currency depreciation, we could give room
for investors to adjust to the new reality," he said.
(Reporting by Leika Kihara; Editing by Chizu Nomiyama and
Aurora Ellis)
