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Exit from QE may force emerging nations to hike rates: S. Korea

(Xinhua)

20:23, June 26, 2013

SEOUL, June 26 (Xinhua) -- Exit from quantitative easing in advanced economies may force emerging nations to hike interest rates in response to a rise in global interest rates arising from the exit, the head of South Korea's central bank said Wednesday.

Emerging economies with open capital markets "may be forced to tighten monetary policy to fight against capital outflows and associated exchange market pressure stemming from the rise in the global interest rate," Bank of Korea (BOK) Governor Kim Choong-soo said at a conference held in central Seoul.

Kim's remarks came amid foreign capital outflow from the local financial market and the simultaneous rise in the won/dollar exchange rate caused by U.S.Fed Chairman Ben Bernanke's comments that the U.S. central bank may taper its bond purchasing program later this year before ending it by mid-2014.

The BOK chief said that extraordinary monetary easing by major central banks has been beneficial to the global economy despite some negative spillover effects on emerging nations.

Kim, however, cautioned that forward-looking financial markets were likely to respond abruptly "no matter how transparent and gradual is the exit from the current monetary stimulus," citing the recent market turmoil at home and abroad following Bernanke's comments. The BOK cut its policy rate by 25 basis points to 2.5 percent in May, but market interest rates turned upward in early May, pressuring the country's debt financing market.

Corporate bond sales, or those issued by industrial companies, tumbled 44.5 percent in May from a month earlier, and bond issuance by financial firms declined 10.2 percent last month, according to the Financial Supervisory Service (FSS).

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