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.