Ringgit May Fall Should Malaysia Hold Interest Rates, UBS Says

By Patricia Lui

July 21 (Bloomberg) -- Malaysia's ringgit may decline should the central bank refrain from raising borrowing costs this week amid accelerating inflation, according to UBS AG, the world's second-biggest currency trader.

The local currency has retreated 3.4 percent from a decade high in April after elections the previous month saw Prime Minister Abdullah Ahmad Badawi's power base erode, with opposition leader Anwar Ibrahim challenging his leadership. Bank Negara Malaysia has kept interest rates unchanged since April 2006 while a government report this week may show inflation quickened to a 26-year high.

``The ringgit has been underperforming quite a bit in recent sessions due to the political uncertainty and if we do see a jump in inflation data and the central bank leaves rates unchanged, the ringgit may fall,'' Nizam Idris, a Singapore- based currency strategist at UBS, said in an interview.

The ringgit may weaken to 3.25 against the dollar in the coming days, a level last touched on July 11, Nizam forecast, from 3.2362 as of 2:09 p.m. in Kuala Lumpur, according to data compiled by Bloomberg.

Central banks of Indonesia, Philippines, Vietnam and India have raised interest rates this year to combat inflation as crude oil prices touched an all-time high of $147.27 a barrel this month.

Malaysia increased fuel prices by 41 percent last month. The annual pace of inflation in June will accelerate to 6.6 percent, from 3.8 percent in May, according to a Bloomberg News survey of economists. The government is due to release the data on July 23, before the central bank's policy meeting on July 25.

Rate Expectations

The central bank will raise the overnight policy rate to 3.75 percent from 3.5 percent, according to the median forecast of 16 economists in a Bloomberg survey. Eight analysts forecast a quarter-percentage point increase, one expects a half-point raise and the remaining seven don't expect any change.

The inflation basket comprises government-controlled items which may affect its accuracy, Nizam said.

``If you want to curb inflation and you base it on data distorted by subsidies, you may be lulled into complacency and not react sufficiently,'' Nizam said.

Recent political uncertainties and economic data showing signs of slowing growth ``may complicate matters'' and ``keep the central bank a bit cautious on rate hikes,'' he said.

Malaysia's inflationary expectations are ``contained'' and rising prices are being driven by higher costs rather than increased demand, Second Finance Minister Nor Mohamed Yakcop said today, adding that last month's fuel-price increase may trigger a ``one-off hike'' in the inflation rate.

Growth Outlook

The Malaysian Institute of Economic Research cut this year's economic growth forecast to 4.6 percent from an earlier estimate of 5.4 percent, the Business Times reported on July 18. The economy may expand between 4.5 percent and 5 percent this year, the central bank said on June 30.

Anwar was arrested and released on bail last week on allegations of sodomy, which he said were fabricated to derail his political comeback. He was fired as deputy prime minister and jailed in 1998 after similar accusations. He has vowed to topple Abdullah's Barisan Nasional government by mid-September.

To contact the reporter on this story: Patricia Lui at plui4@bloomberg.net