By David Yong
July 28 (Bloomberg) -- Malaysia's ringgit may fall by up to 1 percent, erasing its gain in 2008, after the central bank unexpectedly kept interest rates on hold, according to Sumitomo Mitsui Banking Corp. and Citigroup Inc.
The currency may decline to 3.295 against the dollar by year-end, the lowest since Jan. 23, Sumitomo Mitsui Banking, Japan's second-biggest lender, forecast after borrowing costs were left at 3.5 percent on July 25. Citigroup, the biggest financial services group, and Brown Brothers Harriman & Co. said the currency may weaken to 3.28.
The ringgit dropped as much as 0.5 percent today, the most in more than a month, on concern that inflation will accelerate from the highest in 26 years last month after the government raised fuel prices on June 5. Economic growth may slow to between 4.5 percent and 5 percent this year, the central bank said on June 30, from 6.3 percent in 2007.
``There's some loss of market confidence in the ringgit,'' said Tetsuo Yoshikoshi, a Singapore-based currency analyst at Sumitomo Mitsui Banking in Singapore. ``I was surprised, considering that they did hike after the fuel price was increased in February 2006. This will disappoint investors. We will see a sell-off in the ringgit and stocks.''
Bank Negara Malaysia has kept its overnight policy rate unchanged in 18 straight meetings since April 2006, citing risks to an economic slowdown and unemployment. The latest decision came with a two-hour delay after the market closed on July 25. Fourteen of 20 economists surveyed by Bloomberg News expected central bank Governor Zeti Akhtar Aziz to lift the benchmark rate to 3.75 percent.
`Negative for Ringgit'
Higher fuel prices pushed inflation to 7.7 percent in June, the most since January 1982, while consumer sentiment fell to a record low last quarter, government and private reports showed.
Bank Negara didn't issue a new estimate for this year's economic growth, though it lifted the inflation forecast to as much as 6 percent, versus 2 percent in 2007.
``This is negative for the ringgit,'' Win Thin, a senior currency strategist at Brown Brothers, wrote in a July 25 research note, referring to the decision to keep rates on hold. ``We see dollar-ringgit moving higher as markets have punished countries that are considered behind the inflation curve.''
The ringgit fell 0.4 percent to 3.2630 per dollar as of 9:57 a.m. in Kuala Lumpur, according to data compiled by Bloomberg. The currency may weaken to about 3.28 ``near-term'' and a break would next target the 3.329 level, he said.
Forwards Contracts
Non-deliverable forwards contracts show traders pared bets on how much the ringgit will advance in the next 12 months. The implied rate for the currency was 3.2473 compared with 3.2130 two weeks ago. Forwards are agreements in which assets are bought and sold at current prices for future delivery.
The decline today erased all the ringgit's advance in July. The currencies of India, the Philippines, Indonesia and Vietnam have strengthened this month as central bankers increased borrowing costs to quell inflation sparked by higher oil and food prices.
``The sell-off reflects the market's disappointment with the decision,'' said Kit Wei Zheng, a Singapore-based economist at Citigroup, the fourth-largest currency trader. ``This will increase the likelihood that they will spend some reserves to defend the currency'' near 3.28, he said.
Malaysia may still raise its benchmark rate to 4 percent by year-end because second-round effects from surging food and energy prices will show up later, said Kit.
Political factors may have come into play for now and Malaysia's decision is likely a case of delayed, rather than a refusal to raise interest rates, he said.
Political Factors
The ruling National Front coalition government is trying to regain public support after its worst electoral performance in March elections since independence in 1957. Malaysia's ringgit plunged the most in nine months and stocks had the biggest fall in a decade after the poll showed the Front lost its two-thirds majority in parliament and ceded control in five of 13 states.
Prime Minister Abdullah Ahmad Badawi may face a leadership fight in December, when the United Malay National Organization holds its general assembly, Sumitomo's Yoshikoshi said. UMNO is the dominant party in the Front coalition.
Bank Negara's decision must have been reached after taking into consideration the political turmoil, he said.
``My forecast factored in the UMNO internal election in December,'' he said. ``In addition, I expect commodity prices to plunge around the end of the year which is ringgit-negative.''
Malaysia is the world's second-largest palm oil exporter and the second-biggest oil producer in the region.
To contact the reporter on this story: David Yong in Singapore at dyong@bloomberg.net.
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