BOK chief warns of fallout from monetary expansion

SEOUL, July 19 (Yonhap) -- The head of South Korea's central bank emphasized the need Tuesday for an accommodative monetary policy to cope with a drawn-out economic slump but cautioned against its potential adverse impact causing financial instability.

"It's necessary to implement monetary policy in a direction that supports the recovery of a growth trend and also to pay keen heed to risks to financial stability," Bank of Korea (BOK) Gov. Lee Ju-yeol said in an international forum here.

He cited the vulnerability of a "small open economy" to external impact.

South Korea's economy, the fourth largest in Asia, is categorized as a small open economy for its heavy dependence on exports and massive foreign investments in its equity market.

In June, the BOK slashed its key rate to a record low of 1.25 percent despite worries that an excessively low-level rate may prompt the outflow of foreign capital here and balloon already high household debts.

The market is keenly interested in whether the BOK will lower the rate again within this year.

"(South Korea) should strengthen efforts to reduce the negative impact of external factors on domestic finances and the economy," Lee said.

He stressed the importance of structural reform and international cooperation.

"Economies of countries with strong fundamentals get away from outside impacts relatively quickly," he pointed out. "There is a limit to resolving the various troubles each economy faces only through monetary policy."

Hyun Jung-taik, chief of the Korea Institute for International Economic Policy (KIEP), echoed the view.

He warned of the fallout from recklessly expansionary monetary and fiscal policies without robust structural reform.

The BOK and the KIEP co-hosted the conference, with the U.S.-based Peterson Institute for International Economics (PIIE).

Participants included Swiss National Bank Chairman Thomas Jordan, Bank of Israel Gov. Karnit Flug and PIIE President Adam Posen.

lcd@yna.co.kr
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