Raising interest rates to combat high inflation endangers global economy

The policy of many countries to raise interest rates to combat inflation could result in a recession or a slowdown in economic growth, according to Charles Yuji Horioka, professor of economics at Kobe University in Japan, on Monday.

In an exclusive interview with Anadolu, Horioka said that the main drivers behind the current economic recession worries around the globe include the COVID-19 pandemic, high inflation, the Russia-Ukraine war and high fuel prices.

Although the COVID-19 pandemic has caused a severe disruption in economic activity and declines in GDP across the globe, Horioka noted that economies are currently improving thanks to stimulative policies implemented by various governments in an attempt to offset the pandemic’s negative impact.

However, he observed that another current issue is very high inflation, which many countries are attempting to alleviate by raising interest rates and which he warned could lead to a recession or economic slowdown.

‘It is difficult to know what is the best policy to simultaneously address the recession as well as high inflation,’ Horioka said.

Türkiye and Japan are two examples of countries that have kept interest rates low or implemented quantitative easing policies, both of which are stimulative monetary policies, he noted.

Another policy that is now prevalent amid the many simultaneous crises in the world’s economies is deglobalization, which is causing supply chain disruptions and shortages.

‘Deglobalization is a good policy in the sense that it reduces reliance on other countries and achieves greater security, but at the same time, you will no longer get the benefits from trade,’ he said.

Commenting on Türkiye’s Economy Model, unveiled in the last quarter of 2021, he said it is a good model in general because it emphasizes growth and exports, etc., with the benefit of low interest rates that stimulate investment and consumption.

Instead of higher interest rates, Türkiye’s new model aims for a low current account deficit and a high growth rate through investment, production, employment and exports.

However, he warned that, as inflation is already quite high, the danger is that this low interest rate policy might lead to a further increase in inflation.

He advocated for more expansionary fiscal policies, which will play a major role in bringing economies out of recession.

‘So I think it is important to monitor what is going on and to try to make sure that inflation is kept under control and that the economy is stimulated at the same time. It is a very difficult dilemma that Türkiye and other countries are facing,’ he concluded.

• Commenting on Türkiye’s Economy Model