Bank of Korea Governor Kim Choong Soo urged major central banks to plan an orderly withdrawal of excess liquidity and said that further easing may hurt emerging economies and the global economic recovery.
Extra loosening “could do more harm than good when the financial markets are already flooded with cheap liquidity but remain nonetheless timid in their lending to the private sector,” Kim said in a speech prepared for a lecture at Goethe University in Frankfurt, Germany.
Monetary easing by the U.S. Federal Reserve and the European Central Bank has been “highly correlated” with capital inflows and exchange-rate volatility for emerging economies, Kim said. Financial “spillovers” from advanced economies pose risks to investment and growth for nations including South Korea, he said.
Some investors, including Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., are betting that the Fed will embark on a third round of large- scale asset purchases as the U.S. struggles with elevated unemployment. In its first two rounds, the Fed bought $2.3 trillion of bonds from December 2008 to June to avert deflation and spur growth.
“An orderly withdrawal of the current excess liquidity should be pre-planned by major central banks,” Kim said.
He said “prudent and coordinated” management of global liquidity and enhanced surveillance of capital flows could aid global growth by shielding developing economies from potential shocks related to volatility in capital flows.
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