Tuesday, July 22, 2008

Ringgit drops on politics, rate outlook; bonds gain

TheEdge

KUALA LUMPUR: The ringgit declined yesterday on concern that political jitters will cause the central bank to delay raising interest rates amid accelerating inflation.

The currency was trading at 3.2325 against the US dollar as at 5.52 pm, down from 3.2275 the day before, according to data compiled by Bloomberg.

“The prospect for the ringgit may not be so great with the political drawback. The central bank also risks being way behind the curve if it doesn’t raise interest rates this month,” said Joanna Tan, an economist and currency strategist at Forecast Singapore Pte.

Central bank governor, Tan Sri Zeti Akhtar said on July 9 that inflation exceeded 6% last month, something last seen in June 1998. The report on June consumer price changes is due on July 23, and economists are expecting a 6.4% increase from a year earlier, according to Bloomberg survey.

Bank Negara has kept its overnight policy rate unchanged at 3.5% for 17 straight meetings since April 2006, and the next meeting scheduled on July 25 is expected to see a quarter point raise to help curb inflation, Tan said.

The benchmark three-month intervention rate was 11% the last time inflation exceeded 6%, according to Bloomberg.

However, economist Wan Suhaimi Saidi of Kenanga Investment Bank predicted that the central bank would leave the interest rates unchanged at its meeting next week. “The local economy is doing okay, but the political stuff is still going to bug investors,” he said.

Ten-year government bonds rose for the third day, pushing yields to the lowest since the start of the month as traders pared expectations for higher interest rates.

“People mostly aren’t expecting any rate increase next week. That is a small positive for bonds, especially after yields reached a good level this week,” said Mohd Syam Yunus, a bond trader at EON Bank Bhd

The yield on the 4.24% note maturing in Feb 2018 fell two basis points to 4.83%, according to the electronic bond exchange of Bursa Malaysia Bhd. The price rose RM1.50 per RM1000 face value to RM95.50.

Ten-year yields jumped more than 1% since the end of March to reach a two year high of 5.02% on July 14, according to Bloomberg.


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