Chinese move may delay expected rise in US interest rate

The dramatic move by the Chinese authorities to devalue the renminbi could delay an expected increase in US interest rates and also mean the ECB has to maintain a looser monetary policy for longer, according to an analysis by Bank of Ireland Global Markets.

If the Chinese currency trades lower on world markets it will lower the price of imports into developed markets and hold down inflation, the bank says, in particular making it more difficult for the euro zone to emerge convincingly from a deflationary period.

The renminbi fell by more than 3 per cent against the US dollar this week after China’s central bank said it was moving to a more market-based system of setting the rate.

While the central bank yesterday tried to assure the markets that it did not see any basis for an ongoing devaluation of the currency, the move is seen as a significant change in response to a sharp slowdown in Chinese growth.

One key impact of a weaker renminbi would be to maintain downward pressure on the price of goods exported from China to developed markets.

When this is combined with falling oil and commodity prices, Bank of Ireland says it could give the US Federal Reserve pause for thought before an expected interest rate rise next month. This would be the first rise since 2008, and is expected to be followed by the UK.

Lower inflation will also put pressure on the ECB to keep rates low and maintain its programme of monetary expansion, the bank say.

The resulting weakness of the euro will help Irish exports, it says. Ireland will also benefit from cheaper imports from Asia, though Irish companies selling in Asian markets will find life tougher if currency depreciation continues.

“The slowdown in China and emerging markets is also having an effect on global commodity prices,” the banks says, with oil and iron ore close to their lowest levels since 2007.

“This is essentially a big tax cut for Irish energy consumers and the manufacturing industry. This will further help Ireland’s transition from export-led growth to a more sustainable domestic-lead growth path.”