Malaysia inflation may hit 26-year high

Malaysia inflation may hit 26-year high
10 July, 2008

By EILEEN NG, Associated Press

Malaysia's central bank chief said Wednesday that recent fuel price hikes may push inflation above 6 percent in June, nearly double May's rate and the highest in 26 years.

"This adjustment (in fuel prices) would be reflected in the consumer price inflation in June, which is expected to exceed 6 percent," Bank Negara Malaysia Gov. Zeti Akhtar Aziz told a banking seminar.

Inflation is expected to remain elevated until early next year due to higher fuel prices and electricity tariffs, before moderating in the second half of 2009, she said.

The central bank will assess the risks to growth at its policy meeting on July 25 to determine if a monetary response is necessary, she added.

Inflation reached a 22-month high of 3.8 percent in May. The last time inflation crossed 6 percent was in May 1982 when it touched 6.1 percent.

The government raised gasoline prices by 41 percent and diesel by 63 percent last month to curb a runaway subsidy bill. It also raised electricity tariffs from July by 18 percent for households and an average 26 percent for commercial and industry users.

Economists are mixed whether a sharper-than-expected rise in inflation will prompt Bank Negara to raise its key overnight policy rate - used by banks to set lending rates - which has been unchanged at 3.5 percent since 2006.

Song Seng Wun, an economist with CIMB-GK Research in Singapore, said Malaysia's inflation rate remains among the lowest in Asia and there is no risk to economic growth just yet.

"Although inflation is up, it's not running away. The central bank is likely to take the middle ground because the economy is not at risk at this juncture from rising inflationary expectations," he said.

Gundy Cahyadi, economist with research firm IDEAGlobal in Singapore, argued that the central bank is likely to raise rates now rather than later while credit growth in the country is still strong.

"It's quite certain that pressure on inflation is going to be sustained well into 2009," he said. "There is still room for them to tighten up the monetary system to curb inflation expectations going forward."

Such a move will also help ease pressure on the ringgit, which has appreciated by 1.8 percent so far this year but is lagging behind other regional currencies, Cahyadi said.

The ringgit is currently hovering at 3.25 to the U.S. dollar.

The government says inflation may cross 5 percent this year, which has fueled public anger. It has promised not to further raise fuel prices this year. Inflation was around 2 percent last year.