Indonesian Rupiah Affected by China Central Bank’s Interest Cut
The Indonesian rupiah - in line with other emerging Asian currencies - feels the negative impact of China’s interest rate cut. According to the Bloomberg Dollar Index, the rupiah had depreciated 0.40 percent to IDR 12,984 per US dollar at 11:10 am local Jakarta time on Monday (02/03), coming very close to the psychological boundary of IDR 13,000. Last Saturday (28/02), China’s central bank announced to cut its one-year deposit rate and the one-year lending rate by 25 basis points each to 2.50 percent and 5.35 percent, respectively.
It was the second time in less than four months that the central bank of the world’s second-largest economy (People’s Bank of China) cut its benchmark interest rates, in another attempt to boost the country’s sluggish economic growth and combat possibly looming deflation. The central bank’s latest move came a few days before the annual meeting of China's parliament. The People’s Bank of China also raised the deposit-rate ceiling from 1.2 times to 1.3 times, implying that Chinese banks are now able to pay a bigger margin over the central bank’s benchmark. This curbs financial repression that has seen China’s savers effectively subsidize debt-funded investment. China’s yuan depreciated to its weakest level since October 2012 after the central bank’s latest move.
A more accommodative monetary policy approach by the People’s Bank of China is felt required to boost the slowing economic growth pace of China. Recently the State Information Center, a Chinese government think-tank, released a report in which it forecasts the economy of China to slow to a growth figure of 7 percent (year-on-year, y/y) in the first quarter of 2015. Apart from concerns about the country’s property industry, growing capital outflows, and tighter control over local government debt, the country’s slowing economic growth is also caused by structural transformation from being an economy driven by trade and investment to one that is driven by domestic consumption.
The economy of China expanded 7.4 percent (y/y) in 2014, touching the lowest economic growth level in 24 years, primarily caused by the cooling property market, collapsing credit, and spiking bad loans, reinforcing expectations that Chinese policymakers will have to boost economic growth through monetary easing.
On Sunday (01/03) a survey showed that activity in China's factory sector contracted for a second consecutive month in February 2015.
Providing further pressures on the Indonesian rupiah, it was reported on Monday (02/03) that Indonesia’s HSBC Markit Purchasing Managers' Index (PMI) declined to 47.5 in February 2015 (from 48.5 in the preceding month), the lowest reading since the survey commenced in April 2011 (a score below 50 signals contraction). Later today, Statistics Indonesia will release Indonesia's February inflation figure.