WASHINGTON (Reuters) - Huge global capital flows and prolonged ultra-low interest rate policies of advanced nations have made it harder for emerging economies to protect their financial system, Bank of Thailand Governor Veerathai Santiprabhob said on Sunday.
Given a surge in the past decade of capital flows driven by global investors seeking "speculative returns," emerging economies have become more vulnerable to exchange-rate volatility that hurt their companies, he said.
"At times, exchange rates could serve as an amplifier of shocks in capital flows instead of being a stabilizer of shock in capital flows," Veerathai said in a seminar on policy challenges for emerging market central banks.
"The movement of the exchange rate is an important channel for small, open economies and have a real impact on profit margins, competitiveness ... and survival of exporting firms."
Spillovers from ultra-loose monetary policies of advanced economies also risk undermining financial stability in emerging economies, Veerathai said.
Emerging market central banks need to follow their advanced nations' counterparts in delaying normalization of ultra-loose monetary policies to prevent their currencies from appreciating, he said.
"Because of this, emerging markets' monetary policies could be distracted from the core mandate of their domestic policy objectives," he said.
"A delay in the normalization (of monetary policy) from the low-for-long rate environment could exacerbate financial system stability."
With household debt already at historically high levels and inflation subdued in their economies, emerging market central banks can look not just at inflation but financial stability in pursuing monetary policy, Veerathai said.
"Financial stability has to be given a more prominent role in monetary policy decisions," he said.