Indonesia’s rupiah depreciated to its lowest level since mid-December 2014 nearly touching the psychological level of IDR 13,000 per US dollar ahead of Federal Reserve Chairwoman Janet Yellen appearance before the US Senate Banking Committee and the US Congress (in a two-day meeting) to elaborate on the Fed’s stance on US interest rates. As US jobless claims fell more than expected, analysts believe that it will not take long before the US central bank introduces higher borrowing costs in the world’s largest economy.
According to a Labour Department report, US jobless claims declined by 21,000 to 283,000 in the week ending on 14 February (from 304,000 in the previous period). Higher borrowing costs in the USA are expected to result in capital outflows from higher yielding yet riskier emerging markets. Most Asian currencies lost ground to the US dollar on today’s trading day (24/02) but it was the rupiah that led these losses. The Indonesian rupiah exchange rate depreciated 0.67 percent to IDR 12,922 per US dollar according to the Bloomberg Dollar Index.
Another factor that put additional pressure on the rupiah today was local companies’ US dollar demand in the context of month-end debt repayments. Traders announced that they suspect that Indonesia’s central bank intervened in the market to somewhat limit the currency’s depreciation.
Meanwhile, Indonesia’s central bank (Bank Indonesia) cut its benchmark interest rate (BI rate) in a surprise move by 25 basis points to 7.50 percent. Bank Indonesia felt it could introduce a lower interest rate environment as inflation is under control, while it expects capital inflows caused by the European Central Bank’s quantitative easing program (which will start in March 2015) to offset the negative impact of capital outflows caused by looming higher interest rates in the USA. Analysts believe that Bank Indonesia may cut its benchmark interest rate further this year. A positive side effect of a lower interest rate environment is that economic growth can accelerate. In 2014 Indonesia’s economic expansion touched 5.02 percent (year-on-year), a five-year low. However, accelerated growth will put pressure on the country’s wide current account deficit as imports rise. Bank Indonesia expects that the current account deficit will be about 3 percent of gross domestic product (GDP) in 2014, roughly similar to the result last year.
Bank Indonesia's benchmark rupiah rate (Jakarta Interbank Spot Dollar Rate, abbreviated JISDOR) depreciated 0.41 percent to IDR 12,866 per US dollar on Tuesday (24/02).
Indonesian Rupiah versus US Dollar:| Source: Bank Indonesia
Meanwhile, the benchmark stock index of Indonesia (Jakarta Composite Index, abbreviated JCI or IHSG) managed to extent its record streak. The index climbed 0.26 percent to finish at 5,417.31 points on Tuesday (24/02), an all-time high.
Jakarta Composite Index: