Central banks should stop series of rate hikes amid deepening recession risks: U.S. expert

All News 13:55 November 09, 2022

By Kim Seung-yeon

SEOUL, Nov. 9 (Yonhap) -- South Korea and other major economies should stop a string of interest rate hikes to fight inflation, as the extended monetary tightening would exacerbate recession risks, a U.S. expert said Wednesday.

Robert Barro, an economics professor at Harvard University, stressed that the central banks around the world, with the U.S. Federal Reserve at the forefront, are "overreacting" to inflation with the string of interest rate increases.

"(It's) probably true now that inflation is transitory, but over one to three year horizon, not from month to month. That is, will end up with permanent boost to price level, not continuing inflation," Barro said via virtual links during the inaugural Seoul Freedom Forum, co-hosted by the Federation of Korean Industries and the Heritage Foundation.

"Ongoing monetary contraction heightens threat of deeper recession ... the Fed and other central banks should stop sequence of rate hikes and see whether inflation comes down gradually. (This) applies also to South Korea," he said.

This file photo shows Robert Barro, an economics professor at Harvard University, speaking at a conference hosted by the Bank of Korea in Seoul, on June 2, 2014. (Yonhap)

Taking the cue from the Fed's hawkish monetary tightening, South Korea has been aggressive in raising the interest rates to stave off inflation.

The Bank of Korea last month raised the key policy rate by 0.5 percentage point to 3 percent, marking the second big-step increase and the eighth rate hike since August last year.

Barro pointed out a surge in the U.S. government spending between 2020 and 2021, a crisis response to the COVID-19 outbreak, as an element that has contributed to pushing up inflation to a new high in decades

"Similar aggressive monetary policy did not cause inflation after 2008-2009 Great Recession," he noted, referring to the global recession sparked by the U.S. subprime mortgage crisis.

"The difference now is vast fiscal expansion."

Barro forecast the South Korean economy, Asia's fourth-largest, will likely grow at an annual rate of around 2 percent but not exceeding that, in the short-term, adding declines in exports may lead to lower growth for some time.

It's "not surprising that Korea's growth rate of real GDP has converged down to 2-3 percent per year, which is typical of advanced economies," he said. "Higher growth depends on more rapid technical progress, which should be encouraged."