South Korea's central bank said Monday that the Federal Reserve's possible reduction or end of its stimulus program is expected to have sizably negative impacts on the local economy.
The global financial markets remained on edge amid speculation that the Fed may begin to scale back its US$85 billion monthly bond-purchasing program this year.
The Bank of Korea (BOK) said in a report to the National Assembly that a recent increase in the volatility of the global markets is likely to be stabilized as market turmoil was driven by adjustment in the investment portfolio rather than by changes in economic fundamentals.
But the BOK added that the Fed concerns will serve as a major uncertainty in the financial markets until its quantitative easing steps come to an end. The bank also said that it may take some time to see the fruits of Japan's stimulus efforts.
"The Fed's pullback or end of its stimulus program is seen as having considerably negative impacts on emerging countries including Korea as well as the global financial markets," the BOK said.
The BOK said that Korea needs to preemptively brace for uncertainty over policy direction by major economies.
Korea should stably manage macroeconomic policies and boost the role of the market-oriented adjustment of the foreign exchange rate, the central bank said, adding that efforts to enhance the local FX and bond markets should be continued.
BOK Gov. Kim Choong-soo said earlier that uncertainty over policy actions in the U.S. and Japan is heightening the need to flexibly respond to the changing situations.
The governor told lawmakers that the Korean economy is likely to grow 0.8 percent on-quarter in the second quarter after advancing 0.8 percent in the first quarter.
"(If the economy grows 0.8 percent on-quarter during the current quarter), the Korean economy may be able to grow near 3 percent (for the year)," the governor said.
Gov. Kim said last week that the BOK may revise up the 2013 growth estimate possibly to 2.8 percent from its current projection of 2.6 percent in July when it unveils revised growth outlook numbers.
The BOK froze the key interest rate at 2.5 percent in June in a bid to assess the impacts of its surprise rate cut in May on the local economy.