Wednesday, July 02, 2008

Inflation likely to hit 6-7pc in June 2008

By Biz Times

BASEL (Switzerland): Malaysia’s inflation is likely to have hit six to seven per cent in June and the central bank would take action on monetary policy in the event of generalised price increases, Bank Negara Malaysia Governor said yesterday.

In an interview, Tan Sri Dr Zeti Akhtar Aziz also said that domestic factors, including recent cuts in fuel subsidies, and a slower external economic environment could lower the growth rate below five per cent this year.

Costlier food and energy prices pushed Malaysia’s May inflation to a 22-month high of 3.8 per cent, even before the government raised domestic fuel prices in June.

“We expect inflation to rise, especially in the month of June following one of the adjustments by the government — the reduction in subsidies. Therefore, for the month of June, inflation is likely to be between six and seven per cent,” Zeti said here.

“We will monitor it very closely — whether this results in the pass-through to other consumer items and whether there are any second round effects like wage increases ... And the central bank will be prompted to take action in the event that it becomes a generalised price increase.”

Joining a growing rank of Asian countries unable to maintain hefty subsidies in the face of soaring oil prices, Malaysia raised petrol prices by 41 per cent this month and lifted diesel prices by 63 per cent as part of a broad reform of energy policy to prevent subsidies from eating up a third of its budget.

Zeti said when setting interest rates, Bank Negara had to assess effects of both higher inflation, as well as domestic and external factors moderating growth.

Zeti has said that the central bank had no immediate plan to hike interest rates if inflation tapers in the second half in line with its forecast.

The cost of borrowing has stood at 3.5 per cent — one of Asia’s lowest — for the 17th straight policy-setting meeting.

“Interest rate is an instrument of policy to deal with demand-driven inflation,” Zeti said.

“Our interest-rate policy is forward looking. We will look at what the risks are — upside risks to inflation and downside risk to growth as a result of a slower external environment, and as a result of a moderating impact of higher energy prices.”

Asked if investors were wrongly betting on a possible quarter- or half-point increase in interest rates, Zeti said:

“The market is assessing it, based on a price increase, and it is not wrong to assess that indeed prices are going to increase, based on the adjustment Malaysia has taken.”

Inflation is a problem vexing the broader Asia region’s policymakers.