KUALA LUMPUR, April 14 – Malaysia’s ringgit retreated to a one-week low after the central bank said inflation could be contained, damping speculation of a rise in interest rates.

Bank Negara Malaysia did not see second-round effects emerging from faster price increases, and demand was “quite modest”, governor Zeti Akhtar Aziz said in an April 12 interview in Washington.

The Southeast Asian nation will probably report this week that inflation in March held at the highest level in more than two years, according to the median estimate in a Bloomberg survey of economists.

The ringgit weakened 0.4 per cent to 3.2490 per dollar as at 10.49am in Kuala Lumpur, according to data compiled by Bloomberg. It reached 3.2495, the lowest level since April 8. One-month implied volatility, a measure of expected moves in the exchange rate used to price options, rose five basis points, or 0.05 percentage point, to 6.57 per cent.

“The ringgit is seeing some selling pressure because the central bank governor has signalled that inflation is manageable and there may not be a need to raise policy rates, which throws off expectation of a hike,” said Wong Chee Seng, a Kuala Lumpur-based currency strategist at AmBank Group.

“Concerns over US corporate earnings and the Russia-Ukraine situation are also weighing on sentiment.”

The Standard & Poor’s 500 Index recorded its biggest five-day drop since 2012 last week amid speculation stock valuations have climbed too high. Ukrainian security forces clashed with pro-Russian gunmen in the eastern town of Slovyansk, prompting Russia to seek an emergency meeting of the United Nations Security Council.

Financial imbalances

Consumer prices probably rose 3.5 per cent in March, matching February’s pace that was the fastest pace since June 2011, according to the median forecast of economists in a Bloomberg survey before data due on Friday.

Malaysia has raised fuel and power tariffs, and plans to introduce a consumption tax in 2015 to lower the fiscal deficit, raising the prospect of further price pressures.

Inflation did not stem from strong demand, and the central bank would monitor developments closely, Zeti said in the interview.

Signs of financial imbalances would also be a factor in policy decisions because a prolonged period of accommodation could encourage investors to misprice risk and misallocate resources, she said,

One-year interest-rate swaps fell one basis point to 3.51 per cent after reaching 3.52 per cent on Friday, the highest level in more than two years.

Bank Negara has held the benchmark rate at 3 per cent since May 2011. Twelve of 17 economists surveyed by Bloomberg see the central bank increasing borrowing costs by at least 25 basis points this year.

The yield on Malaysia’s 4.181 per cent sovereign bonds due July 2024 was little changed at 4.09 per cent, data compiled by Bloomberg show. – Bloomberg