Inflation Is Still A Concern

Inflation Is Still A Concern

- The Star Online, 24th May 2011

Inflation may accelerate, should there be more cuts to the fuel subsidy or hike in electricity tariffs.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said the inflation rate would be revised upwards, depending on price increases.

Malaysia’s inflation rate rose to a 24-month high of 3.2% year-on-year in April after a 3% increase in March.

A rise in inflation, of between 3% and 3.5%, has been priced into the central bank’s projections, Zeti told reporters yesterday following the launch of “Leading Voices,” a new global thought leadership platform by the International Centre for Leadership in Finance (ICLIF)

However, the country’s diversified economy is now better able to withstand inflationary pressure compared with the period prior to the July 2008 price peak for crude oil. Prices then had reached US$147 per barrel compared with today’s US$97 to US$98.

“We’ll not be immune to price increases but the impact will be less as we’ve enhanced efficiencies in the economy,” Zeti, also ICLIF chairman, said.

Economists expect inflation to pick up in the second half of the year as subsidies continue to be further rationalised.

The expected hike in electricity tariffs this week, according to analysts, would likely be in the vicinity of 5% to 10%. With the costs of subsidies rising this year to over RM20bil from RM10.3bil last year, more cuts in subsidies would be in the offing with even a review of RON 95 petrol, currently retailing at RM1.90 per litre.

AmResearch senior economist Manokaran Mottain said in a report dated May 19 that the need to assist economic recovery and fund Economic Transformation Programme projects would likely pressure the central bank to keep the benchmark overnight policy rate (OPR) at 3% for the rest of the year.

Bank Negara last raised the OPR by 25 basis points on May 5. The central bank also increased the statutory reserve requirement by 100 basis points to 3%.

“Inflation will likely accelerate further in the near term due to the recent rise in global crude and food prices as well as the Government’s plan to implement the subsidy rationalisation programme.

“With the subsidy cut already factored in the central bank’s inflation estimate of 2.5% to 3.5%, we do not expect any policy review in the monetary policy, especially the OPR in the short-term,’’ he said.

In his latest report, Manokaran said if the government wants to maintain prices at current levels, an increase in subsidies would mean a reduction in other expenditures, be it operating or development. The Government may introduce austerity measures to operating expenditure, such as reducing ministries’ expenses like overheads and promoting fiscal prudence.

However, trimming development expenditure especially will be detrimental to economic growth and welfare of the country. In this context, the Government has no other option other than to introduce a gradual cut in subsidies. Despite lower commodity prices currently, the policy-tightening cycle in Asia was not over yet, said Hong Kong-based Societe Generale SA fixed income strategist Chong Wee-Khoon. Economic fundamentals and growth data in emerging Asia were still strong and upside price pressure remained acute, he said.

“Strong credit and lending growth warrants further monetary and liquidity tightening, both in terms of reserve requirements and policy rate hikes, even if food and commodity prices level off in the coming months, as the base effect kicks in,” Chong said.

On another note, Zeti said the central bank had not discussed with the Finance Ministry over nominations to the International Monetary Fund’s (IMF) managing director post after incumbent Dominique Strauss-Kahn resigned following his recent arrest.

She said the trend of a European heading the IMF would most likely continue.

Source: The Star Online, 24th May 2011