Economists see inflation soaring to six per cent

Economists see inflation soaring to six per cent
5 June, 2008

By : Jeeva Arulampalam and Rupa Damodaran, NST

KUALA LUMPUR: Economists said inflation could double to six per cent this year after the government decided to increase fuel prices and allow electricity tariff to rise.

They also think that economic growth could fall below the government’s official target of between five per cent and six per cent.

Bank Islam Malaysia senior economist Azrul Azwar Ahmad Tajudin said consumer spending would be hit, resulting in a cutback on non-essentials.

“People will not be spending on designer labels and expensive restaurants or will think twice about buying new cars and properties,” he said.

Thus, businesses that depend on consumer spending such as retail, tourism, travel and automotive are likely to be badly affected.“Not only are there threats of lower revenue for businesses that are directly affected, the risk of slower economic growth could pull the overall (stock) market down,” said Azr ul.

CIMB Investment Bank chief economist Lee Heng Guie expects the impact to be felt in the second half of the year.

“The economy will go through a phase of adjustment,” he said.

AmInvestment Bank economist M. Manokaran said the price increases came at a time when food prices had hit an all-time high.

On the cash payments of RM625 for cars of 2000cc and below, they said an average of RM52 per month was insufficient to weather the steep 41 per cent rise in petrol price.

For instance, a 1600cc car which consumes 250 litres of petrol monthly would have to pay RM675 now, compared with RM480 previously.

Manokaran said the central bank would have to review the current overnight policy rate, which determined banks’ lending rates.

“Bank Negara can’t hold at 3.5 per cent and we could see an adjustment of 25 to 50 basis point in early third quarter (July or August),” he said.