Malaysia’s Ringgit Falls as Inflation Increases Rate-Rise Odds

Malaysia’s ringgit fell as the fastest inflation in a year fueled speculation interest rates will be raised amid an economic slowdown.

The introduction of a 6 percent goods and services tax in April is putting pressure on domestic prices, while import costs are rising after the ringgit slumped 15 percent this year in Asia’s worst performance. While boosting borrowing costs may be the “bitter pill Malaysia has to swallow to anchor important macro variables,” such a move could spur further capital outflows, especially if it “compromises an already fragile economy,” said Nizam Idris, Singapore-based head of foreign-exchange and fixed-income strategy at Macquarie Bank.

“Hiking rates isn’t always positive to the currency, especially if it’s seen as a move to curb inflation while growth remains weak,” said Nizam.

The ringgit dropped 0.4 percent to 4.1033 per dollar in Kuala Lumpur, after rising as much as 0.3 percent earlier, prices from local banks compiled by Bloomberg show. It reached 4.1340 on Monday, the lowest level since 1998.
Government bond rose, with the 10-year yield falling two basis points to 4.28 percent, according to Bursa Malaysia prices.

The economy expanded 4.9 percent in the three months through June, the slowest pace since the third quarter of 2013. The central bank has kept its benchmark policy rate at 3.25 percent for the past year, refraining from joining a global wave of easing to boost growth.

Bond Outflows

Consumer-price gains quickened for a fifth month in July, rising 3.3 percent from a year earlier, the government reported Wednesday. That’s the fastest pace since August 2014 and more than the median 2.9 percent increase predicted in a Bloomberg survey. The central bank’s annual inflation target is 2 percent to 3 percent.

The ringgit’s drop to a 17-year low is already spurring outflows. Global investors cut holdings of sovereign and corporate bonds by 2.4 percent last month to 206.8 billion ringgit ($50.4 billion), the least since August 2012.

Source - bloomberg.com