SEOUL (Reuters) – Bank of Korea (BOK) monetary policy committee member Suh Young-kyung said on Tuesday that monetary policy needs to be flexible, as trade-offs have intensified between external and internal financial stabilities.
“There is a need to operate macroeconomic policy in a flexible manner in order to maintain internal and external balances,” Suh said, speaking at a policy forum held in Seoul.
The comments come amid growing expectations that South Korea’s central bank may scale back its tightening pace, in response to heightened worries about a credit crunch in domestic short-term money markets, triggered by a government-backed property developer’s default.
In order to respond to inflation pressure from a weak currency, a policy tightening stance should remain, Suh said. But that stance needs to be eased if an economic slowdown due to the spillover from a local credit crunch arises, she said.
The BOK board member said difficulties increased for monetary policy decisions as the inversion of policy rates in South Korea and the United States widened after the Federal Reserve’s rate decision early this month.
“Risks have increased for a double drain in the foreign exchange and domestic financial markets through capital outflows and widening credit spreads for local bonds,” Suh said.
She added that authorities need to respond to increasing volatility in financial markets by implementing various policy measures comprehensively. These include micro-policies to improve supply and demand conditions in the foreign exchange market and for stabilisation of the credit market.
Fitch Ratings said on Friday that the possibility is increasing for the central bank to scale back to a smaller 25-basis-point (bp) interest rate hike in November, considering recent developments in the local bond market.
Investment banks such as Citigroup and ING also forecast a 25-bp rate hike, citing liquidity risks in recently published research notes.
The Fed raised its policy rates by three-quarters of a percentage point early this month, for the fourth time in a row, to the range of between 3.75% and 4.00%.
The BOK’s monetary policy committee next meets on Nov. 24 for this year’s last rate decision, having raised its policy rate by a total of 250 basis points since August last year to 3.00%.
(Reporting by Jihoon Lee; Editing by Kenneth Maxwell)