Wednesday 20 July 2011

Inflation hits 27-month high

KUALA LUMPUR, July 20 — Malaysia’s inflation rate rose to a 27-month high of 3.5 per cent in June, driven by higher food and transport prices.

The government cut back on food and fuel subsidies in recent months in a bid to trim its ballooning budget deficit, which was 5.6 per cent of GDP last year.

The rising inflation rate could put additional pressure on Bank Negara Malaysia (BNM) to raise its benchmark interest rate later this year.

Most economists polled by Reuters expect the central bank to raise key interest rates by at least 25 points at its next policy meeting in September after maintaining the benchmark overnight policy rate (OPR) at three per cent earlier this month.

Forecast economist Radhika Rao told the news agency that higher transport prices, power tariff increases and strong domestic demand suggest that inflation will continue to trend upwards in coming months.

“Added to the mix are the upcoming Ramadan festivities, with the BNM likely to walk a tight rope yet again at the September meet,” she said.

DBS Bank economist Irvin Seah said last month’s inflation figures will serve as a reminder to policymakers that the fight against inflation is not over despite rising risks to growth.

“Although we believe that the longer-term cost arising from high inflation will outweigh the near-term risk to growth, we do recognise that Malaysia is coming to the end of its interest rate normalisation,” he told Reuters.

But he added that BNM, which began normalising interest rates earlier than many central banks in the region, will likely have “room to pause” and assess the situation before deciding on the next course of action.

“Growth momentum should re-accelerate in the second half of the year on the back of a gradual recovery in the US and resilient economic outlook in the region,” he said.

“Inflation may rear its head again and a negative real policy rate is probably the last thing needed.”

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