WASHINGTON : 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.