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Pick-up in Malaysia inflation rate likely [20-04-2011]  
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Food and fuel prices are the likely causes for the inflation level to accelerate in March.

Economists said the Consumer Price Index (CPI) in Malaysia is still considered benign compared to the others in the region, with the index being driven by supply side factors.

Bank Negara Malaysia (BNM) is expected to resume its interest rate normalisation process from May onwards.

A Business Times poll expects the CPI to record a 3.12 per cent growth for March, up from 2.9 per cent in the previous month.


The Statistics Department will release the data today.

Gundy Cahyadi of OCBC Bank said inflationary trends remains tilted to the upside for now, and there is some chance it may inch towards 4 per cent by the mid year before coming off in the later part of the year.

Standard Chartered Bank economist Alvin Liew said while the usual suspects - food, transport and housing costs - likely remained the key inflation drivers, more broad-based upside price pressure can be expected, especially in categories such as restaurants and hotels, healthcare and miscellaneous goods and services.

This is because of robust domestic demand and higher wages.

Elevated inflation - not just in Malaysia but also across the region - will keep the markets focused on central bank policy, which is complicated by external concerns in Europe, the Middle East and Japan.

"We believe inflation will remain a key challenge for Asia, including Malaysia, in 2011 and 2012," Liew said, adding that inflation will be driven by steady economic growth and higher commodity prices

DBS Bank economist Irvin Seah also expects some monetary action from BNM after March's CPI.

"More importantly, this implies that real policy rate is now negative at -0.55 per cent and certainly not conducive for longer term economic stability," Seah said.

A negative interest rate discourages savings and may even induce speculation in asset markets.

Seah said although there are downside risks to growth in the Malaysian economy in the near term, they are not as severe as what was seen during the global financial crisis period.

"Plainly, the big picture is still on inflation ... the fight against inflation is not won yet and BNM cannot indefinitely enjoy the benefits of its tightening moves last year without actively addressing the current inflation risk.

"Policymakers will really have to step on the brake with monetary policy or risk falling behind the curve in curbing inflation," he said.

He felt that BNM had missed the most ideal window to raise rate back in the March meeting.

Failure to do so in the coming May meeting could invite higher inflation expectation and thus even more drastic monetary tightening ahead. he added.

Source:BUSINESS TIMES
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