South Korea’s central bank chief said a U.S. pullback from monetary easing would spur risks worldwide from rising bond yields, adding to a global debate over how to manage costs from exiting record stimulus.
“If the U.S. begins to exit from quantitative easing policies, the world will be facing interest-rate risks, in terms of how much would bond yields rise,” Bank of Korea Governor Kim Choong Soo said in a speech today in Seoul to heads of banks. Whether the international Basel III capital standards could require banks to increase assets as bond prices fall is a “problem to think about,” he said.
Kim’s comments add to concern that the impact of the U.S. Federal Reserve’s eventual efforts to reverse record easing will be felt around the globe. International Monetary Fund economists said in a report last week that a “potential sharp rise in long-term interest rates could prove difficult to control,” undermining growth and financial stability.
The head of Mexico’s central bank said in February that some emerging-market economies may face a reversal of “massive capital flows” as major advanced economies tighten monetary policy. Reserve Bank of India Governor Duvvuri Subbarao said May 4 that any unwinding of “extraordinary quantitative easing” in advanced nations may disrupt capital flows to India.
Norman Chan, chief executive of the Hong Kong Monetary Authority, has warned that households accustomed to low interest rates may face risks when borrowing costs rise. Hong Kong’s exchange rate is pegged to the U.S. dollar.
The Bank of Korea earlier this month joined central banks in Australia, Europe and India in May interest-rate cuts, as a weak yen dims the outlook for the nation’s exports and record household debt weighs on consumption. Kim and his board lowered the benchmark rate to 2.5 percent from 2.75 percent.
Federal Reserve Bank of New York President William C. Dudley, who is also vice chairman of the Fed’s policy committee, said yesterday that he has not decided whether the central bank’s next move should be to enlarge or shrink its bond-buying program as he called for a fresh look at its eventual retreat from record asset purchases.
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