Fear of US rate hike hurts rupiah

JAKARTA. The rupiah was the worst performer in the Asian currency market on Tuesday as it plunged to its lowest level in six years amid fears that the US central bank would raise its interest rate.

The rupiah weakened 0.7 percent to close at 12,922 per US dollar, the steepest decline among 13 currencies in the Asia-Pacific region tracked by Bloomberg. That means the rupiah is now trading near its lowest level since the 2008 global financial crisis, or 12,940 per dollar, which the currency touched on Dec. 16.

Bank Indonesia (BI) Governor Agus Martowardojo said despite the steep drop, the value of the Indonesian currency was still within a “reasonable threshold”. 

“We are not targeting a specific level for the currency, we will focus on its stability,” Agus said this week, when asked about the rupiah’s persistent weakness in recent times.

On Tuesday, other emerging currencies also fell — though by smaller margins than the rupiah — anticipating higher US interest rates ahead of Federal Reserve chairwoman Janet Yellen’s speech to the US Congress this week. 

The rupiah’s 0.7 percent fall was the steepest in Asia, compared with a 0.2 percent decline in the Singapore dollar and 0.1 percent fall in the Malaysian ringgit. Meanwhile, both the Philippine peso and the Thai baht were relatively stable.

BI announced a surprise cut in its key interest rate last week, joining other central banks in the region including India, Singapore and Australia, which had loosened monetary policy by cutting interest rates amid easing inflation rates due to a drop in oil prices.

On Tuesday last week, the Indonesian central bank cut the benchmark BI rate by 25 basis points to 7.5 percent, an unexpected move as Agus had consistently championed the need for higher interest rates to guard macroeconomic stability since he was appointed to lead BI in 2013.

The rupiah has fallen by more than 1 percent against the US dollar since the interest rate cut.

“Markets are comparing India to Indonesia — the two high-yielding economies that both eased their monetary policies — and interpreting BI’s interest rate cut to be a bit premature and that is leading to currency weakness,” Sean Yokota, a currency strategist with Swedish investment bank SEB, wrote in an email interview on Tuesday.

Nevertheless, other analysts also noted BI’s interest rate cut might also be a deliberate strategy to weaken the rupiah, which had actually strengthened in real terms against non-US dollar currencies such as the Chinese yuan, the Philippine peso, the Thai baht, the Indian rupee, the Korean won and others.

In terms of purchasing power parity and relative inflation differentials between Indonesia and other countries, the rupiah’s fair value should stand at 13,600 per dollar this year, according to estimates from BNP Paribas, a French investment bank.

BNP Paribas economist Philip McNicholas said the consistent strengthening of the rupiah’s real effective exchange rate (REER) against a basket of major currencies, which had been evident since July 2014, was “destroying hopes for a revival of Indonesian manufacturing”.

In its policy statement released after the interest rate cut, BI said it considered the rupiah’s recent decline to be “beneficial” for improving export competitiveness, especially of manufacturing exports.

“We think the message is that BI will accommodate rupiah depreciation pressure,” said Tim Condon, the head of Asian research with Dutch-based ING Group.

“An implication of the BI board’s conviction, which we share, is that there is ample scope for further rate cuts.”

BI Senior Deputy Governor Mirza Adityaswara argued that the weakness of the rupiah had proven to be effective in promoting Indonesia’s manufacturing exports. He cited data that showed how the total value of manufacturing exports in Indonesia rose by around 7 percent year-on-year in 2014, a period in which the rupiah fell 1.7 percent. (Satria Sambijantoro)