Reuters
June 5, 2008
Malaysian inflation is likely to rise to a 10-year high in 2008 following sharp rises in domestic fuel prices, but the central bank does not need to raise interest rates, the head of the authority said on Thursday.
Malaysia announced a broad overhaul of energy pricing on Wednesday to reduce pressure on government subsidies from the soaring cost of oil, reflecting similar moves by India and Indonesia.
The central bank governor, Zeti Akhtar Aziz, said the energy price rises meant inflation would average 4.2 percent in 2008, well above the central bank’s previous forecast of 2.5-3.0 percent.
Official data shows that would be the highest inflation for any year since 1998, during the Asian financial crisis, when inflation averaged 5.3 percent.
Zeti saw inflation rising above 5 percent in June and peaking around 5.3 percent early in 2009. The latest official figures showed inflation hit a 15-month high of 3 percent in April.
But she said there was no rush for the central bank to consider raising the policy rate of 3.5 percent. At its last review on May 26, the central bank left rates on hold for the 17th straight meeting. The next meeting is due on July 25.
“At this point there is no change in interest rates. We are not prompted to have any monetary policy committee meeting outside the regular schedule,” she said.
Inflation in the first half of 2009 would be around 5 percent, and peaking early in 2009, she said.
“After that it will decline to less than 3 percent,” she said. “This is our preliminary simulation of this price adjustment, and this is what it showed on the month-on-month basis.”
Malaysia’s policy rate is one of Asia’s lowest, and has helped support domestic demand. Thanks to domestic consumption and increased regional trade, the economy grew in the quarter ended March by 7.1 percent from a year earlier.
GROWTH ON TRACK
The reforms announced on Wednesday would save the government 13.7 billion ringgit but risk further stoking public anger against Prime Minister Abdullah Ahmad Badawi, already fighting for his political survival.
Petrol prices rose 41 percent to 2.70 ringgit a litre and diesel 63 percent to 2.58 ringgit earlier on Thursday.
Zeti said she was confident the economy would expand 5 percent in 2008 despite the strength of inflation.
“This is based on assumptions that the compensation and the expenditure by the government is according to what has been announced. Then yes, indeed 5 percent can be achieved,” she said.
To cushion the blow on a population accustomed to pump prices less than half those in neighbouring Singapore and significantly lower than in the United States, the government is planning cash handouts for motorcyclists and small car owners.
As for central banks globally, rising prices are complicating the task of supporting economic growth.
Still, the central bank chief reiterated there were no plans to use the ringgit as a policy tool. The foreign exchange would continue to set the currency’s value, she said.
“That is something that exporters, importers, those who are involved in foreign exchange transactions, they need to know that it reflects market conditions, and therefore its not in our view potential instrument for monetary policy,” she said.