Ringgit falls with bonds as inflation may spur policy response

[KUALA LUMPUR] Malaysia's ringgit and long-term bonds fell as the fastest inflation in a year fueled speculation interest rates will be raised amid an economic slowdown.

The introduction of a 6 per cent goods and services tax in April is putting pressure on domestic prices, while import costs are rising after the ringgit slumped 15 per cent 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 Mr Nizam.

The ringgit dropped 0.5 per cent to 4.1097 per dollar as of 1:24 pm in Kuala Lumpur, after rising as much as 0.3 per cent earlier, prices from local banks compiled by Bloomberg show. It dropped to 4.1340 on Monday, the lowest level since 1998.

The 10-year government bond yield rose three basis points to 4.33 per cent, according to Bursa Malaysia prices. That's the highest for a benchmark of that maturity since 2010.

The economy expanded 4.9 per cent 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 per cent for the past year, refraining from joining a global wave of easing to boost growth.

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

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 per cent last month to 206.8 billion ringgit (S$70.6 billion), the least since August 2012.

BLOOMBERG