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Ringgit Posts Best Week of 2011 as Interest Rates May Climb

Malaysia’s ringgit completed its best week this year and reached the strongest level in 13 years on speculation borrowing costs will be raised to help cool inflation.

The currency had its first weekly gain in three as economists surveyed by Bloomberg predicted consumer prices in Southeast Asia’s third-largest economy rose 2.7 percent in February from a year earlier, the most since April 2009. The statistics department will release the data about 5 p.m. in Kuala Lumpur. Government bonds declined before a debt sale next week.

“Inflation is rising across the region while economic growth in Asia remains resilient,” said Sim Moh Siong, a foreign-exchange strategist at Bank of Singapore Ltd. “Therefore we can expect the tightening cycle in Malaysia to continue.”

The ringgit strengthened 0.8 percent to 3.0255 per dollar as of 4:12 p.m. in Kuala Lumpur from a week ago, according to data compiled by Bloomberg. It gained 0.1 percent today and touched 3.0210, the highest level since October 1997.

Bank Negara Malaysia said on March 23 that economic growth is likely to improve in the second half of the year and the upside risks to inflation have become increasingly visible in 2011. It forecast prices to rise by 2.5 percent to 3.5 percent this year versus 1.7 percent in 2010.

Policy makers have kept the overnight rate at 2.75 percent since July, after raising it three times earlier in 2010. They doubled the statutory reserve-requirement ratio to 2 percent, effective from April 1, to absorb excess cash in the system. The central bank’s next rate-setting meeting is on May 5.

Swaps, Bonds

Bank Negara will raise the policy rate by 25 basis points, or 0.25 percentage point, in May and lift it to 3.5 percent by the end of the year, according to a research note from Standard Chartered Plc today. This should support the ringgit as higher interest rates drive capital inflows, it said.

The bank also recommended paying five-year interest-rate swaps in Malaysia because the market doesn’t appear to be aggressively pricing in higher borrowing costs. The rate may climb to 4.5 percent from the current 4.05 percent, Standard Chartered predicted without specifying the timeframe.

Benchmark 10-year bonds fell this week. The yield on the 4.16 percent note due July 2021 climbed five basis points to 4.06 percent, according to Bursa Malaysia. It rose one basis point from yesterday.

The treasury will sell 4 billion ringgit ($1.3 billion) of debt maturing in September 2014 on March 30. The auction will bring total bond-sale proceeds for this quarter to 24.5 billion ringgit, 29 percent more than in the same period last year.

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