The loop of growth, interest and foreign exchange rates in today’s conditions
According to the latest findings, the Turkish economy’s growth has significantly accelerated. As much as the recovery of the global economy, the acceleration in capital inflows and measures taken to boost the economy have played a significant role in this acceleration. These measures have their own risk potential. Therefore, it would be right to manage this growth considering it as an improvement with a high vulnerability coefficient.
Global acceleration has contributed positively to our growth in the last couple of months, but within the current conjuncture there are some concerns as to whether this could continue until the end of the year. Despite this, the acceleration growth path is not so clear for many countries. For instance, there are some challenges in the United States that lead the issues regarding global growth. Some of those are due to the uncertainty that has occurred because of the economy’s management and management practices of policymakers. But the US also has some issues over economic policies, with the plunge in the inflation-interest-foreign exchange rate loop the most important among them.
The economy gathered speed in the US but has not heated suf- ficiently. Inflation remains low and it is also required to hold interest rates at low levels. Low interest rates are contributing to the growth but also encourage an aversion to the dollar. The problem of countries surpassing the dollar extends to the world. This heats up the dollar flow, hot money comes in and results in further depreciation of the dollar.
As long as the risks and expectations are compatible, the movement of hot money starts, especially with the attractive power of interest rate differences among emerging countries. This trend results in the redefinition of the foreign exchange rate among global markets. As the US dollar depreciates, foreign exchange rates fall among those economies experiencing dollar inflows.
It’s a kind of pattern here – and not a new one. We know that a twist in the hot money capital flow always causes serious imbalances in national economies or leads to a crisis. These twists are often ignited by the change in the risk perception and/or a twist in expectations. The process, which starts with avoiding the dollar, ends with a return to the dollar. Foreign exchange, interest rates and growth trends are than redefined from the start. This is a total inversion and we call it a crisis.