The loop of growth, interest and foreign exchange rates in today’s conditions

Dünya Executive - - COMMENTARY - Taner BERSOY Columnist

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.

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