Malaysia’s Ringgit Declines as Central Bank Damps Rate-Rise Bets

Malaysia’s ringgit retreated to a one-week low after the central bank said inflation can be contained, damping speculation of an interest-rate increase.

Bank Negara Malaysia doesn’t see second-round effects emerging from faster price increases and demand is “quite modest,” Governor Zeti Akhtar Aziz said in an April 12 interview in Washington. The Southeast Asian nation will probably report on April 21 that inflation held at the highest level in more than two years in March, according to the median estimate in a Bloomberg survey of economists.

The ringgit weakened 0.4 percent to 3.2507 per dollar in Kuala Lumpur, according to data compiled by Bloomberg. It reached 3.2518, the lowest level since April 8. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, fell three basis points, or 0.03 percentage point, to 6.50 percent.

“The ringgit is seeing some selling pressure because the central bank governor has signaled that inflation is manageable and there may not be a need to raise policy rates, which throws off expectation of a hike,” said Wong Chee Seng, a Kuala Lumpur-based currency strategist at AmBank Group. “Concerns over U.S. corporate earnings and the Russia-Ukraine situation are also weighing on sentiment.”

The Standard & Poor’s 500 Index recorded its biggest five-day drop since 2012 last week amid speculation stock valuations have climbed too high. Ukrainian security forces clashed with pro-Russian gunmen in the eastern town of Slovyansk, prompting Russia to seek an emergency meeting of the United Nations Security Council.

Financial Imbalances

Consumer prices probably rose 3.5 percent in March, matching February’s pace that was the fastest pace since June 2011, according to the median forecast of economists in a Bloomberg survey before data due next week. Malaysia has increased fuel and power tariffs and plans to introduce a consumption tax in 2015 to lower the fiscal deficit, raising the prospect of further price pressures.

Inflation doesn’t stem from strong demand and the central bank will monitor developments very closely, Zeti said in the interview. Signs of financial imbalances will also be a factor in policy decisions because a prolonged period of accommodation could encourage investors to misprice risk and misallocate resources, she said.

One-year interest-rate swaps fell two basis points to 3.50 percent after reaching 3.52 percent on April 11, the highest level in more than two years.

Bank Negara has held the benchmark rate at 3 percent since May 2011. Twelve of 17 economists surveyed by Bloomberg see the central bank increasing borrowing costs by at least 25 basis points this year.

The yield on Malaysia’s 4.181 percent sovereign bonds due July 2024 was little changed at 4.09 percent, data compiled by Bloomberg show.

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