Opsfeld: "Korea Can Withstand Additional Rate Hikes... Policy Focused on Controlling Inflation"

Professor Maurice Obstfeld of UC Berkeley Holds Press Conference
"Rapid Exchange Rate Rise Not Only Korea's Issue... Won Currency Value Not Low"

Morris Opsfeld

[Asia Economy Sejong=Reporter Kwon Haeyoung] Professor Morris Obstfeld of UC Berkeley stated on the 21st that "South Korea should currently focus its policy on curbing inflation rather than on the economic recession" and called for additional interest rate hikes. Regarding the recent sharp rise in the won-dollar exchange rate due to the 'King Dollar,' he diagnosed that it is "a problem not only for South Korea but also for other advanced and emerging countries" and is not at a level of concern.

At a press conference held on the same day during the 'G20 Global Financial Stability Conference' jointly hosted by the Ministry of Economy and Finance and the Korea Development Institute (KDI) at the Seoul Plaza Hotel, Professor Obstfeld said, "In South Korea's case, the current unemployment rate is low, and the economic growth forecast is not bad. South Korea can withstand additional interest rate hikes." Professor Obstfeld is an economic expert who served as the White House Chief Economist for Macroeconomics during former U.S. President Barack Obama's administration and as the Chief Economist at the International Monetary Fund (IMF).

He particularly emphasized that compared to other countries with severe inflation such as the UK, Europe, and the United States, South Korea is relatively better positioned to utilize inflation control policies.

He said, "If South Korea fails to curb inflation and prices continue to rise, it will have to endure higher unemployment rates and production losses later on," adding, "There may be negative impacts on the economy for the next few quarters, but this can be seen as an investment for the future." He pointed out that if inflation control policies fail as they did in the 1970s, household and corporate inflation expectations will rise, which could further negatively affect the economy and income inequality.

He also stressed the necessity of monetary tightening by global central banks and the importance of policy coordination. He analyzed, "Central banks of each country need to continue monetary tightening," adding, "Since many countries have negative real interest rates, there is still considerable room for (interest rate hikes)." He urged close cooperation among central banks to convey the message of inflation control and to adjust the pace of tightening to prevent recession risks.

Regarding the won-dollar exchange rate, which recently approached the 1,400 won mark, Professor Obstfeld diagnosed, "This is a phenomenon caused by the strong dollar due to U.S. interest rate hikes rather than won depreciation." He said, "Looking at the real effective exchange rate against trading partners from 2010 to the present, the current won value is not that low," and assessed, "South Korea remains a good investment destination, and the risk of capital outflow is not high."

However, regarding direct or indirect intervention by foreign exchange authorities in the foreign exchange market, he expressed skepticism about whether market participants can be effectively persuaded, stating, "Foreign exchange reserves should be maintained for other purposes." He also viewed the possibility of a Korea-U.S. currency swap agreement as low.

He expected U.S. interest rate hikes to continue until the first quarter of 2023. He forecasted, "The U.S. is expected to stop raising policy rates at around 4-5%, and in some cases, rates may exceed 5%," adding, "The timing of stopping rate hikes will depend on when household and corporate inflation expectations decline." Specifically, he anticipated that rate hikes would stop when expected inflation is around 5% annually.

He also suggested the possibility of a recession occurring in Europe and the UK as early as the fourth quarter of this year. He analyzed, "Inflation is progressing faster in Europe and the UK, and energy supply issues are negatively affecting production, consumption, and investment sentiment," adding, "Europe may enter a recession around the fourth quarter of this year or the first quarter of next year."

Meanwhile, Professor Obstfeld stated, "(The U.S.) central bank is clearly communicating its intention to curb inflation" and drew a line on the possibility of global stagflation (low growth and high inflation) spreading. He said the U.S. economy remains robust. He added, "If the central bank acts decisively to curb inflation, the possibility of stagflation is low," but "it will take several years to curb inflation, and it cannot be guaranteed that economic growth will fully recover to pre-COVID-19 levels."

This content was produced with the assistance of AI translation services.