International | May 22 2006
By Chris Shaw (Tokyo)
Since moving from a pegged exchange rate to a managed float last year the Malaysian ringgit has risen almost 5% against the US dollar, with ANZ Bank suggesting further gains are likely.
The currency is now trading at around 3.61 to the US dollar, but the bank suggests a level of 3.55 is likely by the end of 2006 and 3.50 could be achieved by the end of next year.
It expects the currency’s performance against the Australian dollar to be even better, with the bank forecasting a rate of 2.49 to the dollar by the end of this year and 2.35 by the end of 2007, compared to 2.75 currently.
Supporting its outlook for a stronger currency is the bank’s view a further 0.25% increase in interest rates is likely before the end of the year as inflation continues to increase, having reached 4.6% in April thanks to higher fuel prices. Also pushing inflation higher is the likelihood of higher electricity prices, leading the bank to lift its forecast for average inflation this year to 4% from 3.5% previously.
The inflationary environment is also a factor of the nation’s productivity growth, which came in at 3% in 2005 and is forecast to reach 3.3% in 2006 thanks to high capacity utilisation. This lack of spare capacity could add to inflationary pressures as input costs are moving higher.
The combination of higher interest rates and inflation is likely to impact on growth, the bank forecasting full year GDP to increase by around 5.3% both this year and next, which is below the central bank’s estimate of a 6% increase. Standard Chartered doesn’t agree though, suggesting the economy should remain strong despite the inflationary pressures. The bank has lifted its growth forecast for 2006 to 5.5% from 5% previously.
