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Strong Ringgit Keeping Imported Inflation At Bay, Says Economist [24-01-2011]  
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Despite the high inflation rate recorded by many of the emerging markets recently, due to a rise in global commodity and food prices, price increases in Malaysia still remain to be driven mostly by the subsidy cuts implemented by the government, said AmResearch today.

Its economist Manokaran Mottain said the appreciation of the ringgit by 2.8 per cent in December has been instrumental in keeping imported inflation at bay.

On top of that, he said, the usage of price controls has also ensured that the prices of essential goods in Malaysia are relatively much lower compared to most countries in the region.

Pointing out specifics, he said the price of RON 95 petrol in Malaysia was 30 per cent lower than the price in Indonesia, and more than two times lower than that in Singapore and Thailand.

Sugar, which is priced at RM2.10 per kg, is estimated to be 67 per cent cheaper in Malaysia than in Indonesia.

"These differences are essential in explaining the smaller impact Malaysia has received in terms of soaring global food and commodity prices," he said to Bernama.

Malaysia's inflation rate rose to 2.2 per cent year on year in December, in line with the research house's estimate and average market expectations.

The rise was mainly driven by the recent subsidy reductions on petrol and sugar, as transport and food prices increased in December.

Month on month, inflation measured by the Consumer Price Index (CPI) registered an increase of 0.4 per cent while for the year as a whole, inflation grew by 1.7 per cent versus a 0.6 per cent increase in 2009.

"Moving ahead, we now acknowledge inflation to be at a higher range of 2.5 per cent to 3.0 per cent this year, and it will accelerate faster in the second half-year as global economic growth picks up.

"Along with rises in commodity prices, it can accelerate faster, if the government were to implement most of the recommendations under the subsidy rationalisation plan, as initiated by Pemandu (Performance Management & Delivery Unit)," he said.

The last Pemandu subsidy rationalisation was made on December 3 involving a reduction in petrol, diesel, liquefied petroleum gas (LPG) and sugar subsidies.

It was the second step in its gradual subsidy rationalisation programme.

The second subsidy rationalisation would allow Malaysia to reduce government expenditure by about RM1.18 billion, higher than the first which had reduced government expenditure by more than RM750 million.

Manokaran said further subsidy rationalisation is expected to occur, especially after the Chinese New Year celebrations.

Following Pemandu's proposed subsidy rationalisation and mitigation plan announced early 2010; prices of RON95 petrol and diesel will be increased by 10 sen a litre every six months this year, bringing prices to RM2.10 and RM2.00 respectively by year end, the economist said.

On curbing inflationary pressures, Manokaran said the current 2.75 per cent Overnight Policy Rate (OPR) was at an accommodative level to promote robust growth and curb the pressures.

On the other hand, he noted that if inflation does pick up greatly over the next few months on the back of hikes in global food and commodity prices and "our very own subsidies rationalisation plan", there will be no ruling out of a hike in OPR as early as in March.

"Now, we see at least two hikes which can raise OPR to a high of 3.25 per cent," Manokaran said.

In the short run however, despite expecting no change in OPR, the research house is not ruling out a possible move to increase the Statutory Reserve Requirement (SRR) rate during the next Monetary Policy Committee meeting which will be held on January 27.

Currently at a record low of 1.0 per cent, a possible SRR hike would help to mop up any excess liquidity in the market as a continued rise in interest rate differentials globally encourages increased inflows into the country, he said.

"Based on our estimations, a one per cent hike in the SRR rate would trim the amount available for lending purposes by removing at least RM3.9 billion from the banking system.

"This should be able to avert any possible risk of asset price bubbles forming in the domestic economy," he said.

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