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Malaysia - The Star - Inflation Likely to Hit 2.8% to 3.5% Next Year Print E-mail

Monday December 17, 2007

Inflation likely to hit 2.8% to 3.5% next year

By Hanim Adnan

The inflation rate in Malaysia is expected to hit 2.8% to 3.5% next year despite the Government's projection that it would remain unchanged at 2% to 2.5%.  

Economists contacted by StarBiz concurred that the pressure in Malaysia was triggered by cost-push inflation, given the high prices of crude oil and soft commodities globally.  

This is compounded by the possible cut in petroleum subsidies, higher palm oil prices, hikes in utilities and toll rates domestically. 

(Cost-push inflation is a type of inflation caused by large increases in the cost of important goods and services where no suitable alternative is available). 

One consolation, however, is the strengthening of the ringgit due to continued weakness in the US dollar brought on by the US Federal Reserve interest rate cut. There is a likelihood of the ringgit hitting 3.30 to the dollar by year-end and 3.15 to 3.20 by the end of next year. 

Economists said Malaysia had experience in dealing with inflation from a high rate in 1973-1974 and in 1980-1981, to low inflation in 1985-1987. 

Malaysia was able to maintain a low and stable inflation rate during the high economic growth period of 1988 and 1996, which saw the country enjoying one of the lowest inflation rates in the region. 

Singapore-based DBS Group Research economist Irvin Seah said the average inflation rate for Malaysia could rise to about 2.8% next year if the Government decided to cut the fuel subsidy. 

He said: “With the high crude oil prices, the burden of the fuel subsidy on the Government budget would rise sharply and jeopardise the deficit target of 3.1% gross domestic product (GDP) in 2008.” 

A potential cut in fuel subsidy, although unpopular, will reduce the burden on the Government's fiscal position and free resources for better uses.  

Economists say the pressure in Malaysia was triggered by cost-push inflation given the high prices of crude oi

The previous fuel subsidy cut of RM4bil in Feb 28 last year resulted in petrol prices increasing by an average of 21%. 

“We expect the next subsidy cut to be about RM2bil to RM3bil, which will translate to about 10% to 12% increase in petrol prices,” he added. 

In the first eight months, Malaysia spent about RM16bil in petrol subsidies.  

“The amount of subsidy to keep petrol prices low will likely exceed RM20bil this year with the crude oil prices edging US$100 per barrel,” he added. 

Seah said the cut in subsidy would likely be in the first quarter of 2008 and progressive reduction over one to two years would be favoured. 

“A subsidy cut appears unavoidable, but the Government would have to tread carefully with the coming general elections,” he added. 

Aseambankers Equity Research economist Suhaimi IIias said higher food prices in the coming months, given the bullish commodities prices, would push the core Consumer Price Index (CPI) to higher levels in the coming months. 

The CPI in the first 10 months saw a 1.9% increase to 105.4 reflecting increases in essential food items. 

“I believe there will be intense pressure on domestic prices as inflation creeps up in line with higher prices in world food-based commodities, crude oil and utilities,” he added. 

(The CPI measures the average price of consumer goods and services purchased by both rural and urban households in Peninsula Malaysia, Sabah and Sarawak. The percentage changes in the CPI is used as a measurement for inflation) 

Suhaimi said: “We are tentatively looking at an inflation rate of 3% to 3.5% next year.” 

He noted that the estimated 3% rate next year was well below the average long-term inflation of 3.8% experienced in 1970s. 

“The upward revision in inflation forecast will depend on the magnitude of the fuel subsidy cuts and future development in crude oil prices,” Suhaimai added. 

The inflation rate in the past 10 months was less than 2%. 

AmInvestment Bank Bhd senior economist Manokaran Mottain also expects a higher inflation rate of 2.5% to 3% next year compared with the bank's full year projection at 2% (3.6% in 2006). 

While a further cut in petrol subsidy would lead to higher inflation next year, he said there would be no changes on the monetary policy. 

“I expect the Government to retain the overnight policy rate (OPR) at 3.5% while monitoring the inflation and Gross Domestic Product (GDP) growth data in the coming months. 

“There will be no reason to cut interest rates if Bank Negara's 6% GDP growth projection in 2007 is realised (5.9% in 2006),” he added. Since April last year, the central bank has kept interest rates steady at 3.5%.

(Source: The Star Online, 2007)

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