Inflation from fuel hike won’t force BNM’s hand, analysts say: - TopicsExpress



          

Inflation from fuel hike won’t force BNM’s hand, analysts say: KUALA LUMPUR, Sept 4 – Consumers are set to pay more for everyday items following yesterday’s subsidy cuts, but Bank Negara Malaysia (BNM) is unlikely to raise interest rates to rein in the expected inflation, according to several economists. The prediction that the central bank will not add downward pressure to the economy — at least in the near future — will bode well for Putrajaya’s efforts to trim its budget deficit after ratings firm Fitch Ratings pointed out that slowing growth may make the targeted reduction more challenging. “BNM will be keeping a close watch on growth and market volatility ... For the time being, we expect them to keep on hold,” CIMB Bhd chief economist Lee Heng Guie told The Malay Mail Online. Lee pointed out that BNM will need to keep interest rates down to support growth and reduce uncertainty that comes with the US Treasury’s decision to reduce its financial stimulus in emerging markets, including Malaysia. “BNM has indicated during the release of the second quarter for 2013 gross domestic product (GDP) last month that ... monetary policy will remain accommodative to support domestic demand,” agreed Maybank Investment Bank Bhd chief economist Suhaimi Ilias. According to the most recent data from the Statistics Department, Malaysia’s inflation rate — measured by the Consumer Price Index (CPI) — has reached two per cent in July, the highest so far in 14 months. Putrajaya yesterday reduced the subsidy for RON95 petrol and diesel by 20 sen per litre, raising their respective prices to RM2.10 and RM2.00. Research house AmResearch Sdn Bhd had predicted yesterday that the fuel price hike will drive up the average inflation rate in 2013 to 2.2 per cent. “The cost component of transport contributes 14.9 per cent to the basket of CPI. With the petrol pump price increase, the transport index is likely to register an increase of 3.2 per cent in 2013,” said its daily report yesterday. Maybank Investment Bank in its daily report yesterday also revised its prediction for average inflation rate up by 0.3 percentage point to 2.1 per cent. Other research houses have also revised its average CPI estimate for 2013 up by 0.2 percentage point on average, including RHB Research Institute (RHBRI) Sdn Bhd. “As the increase in inflation rate was policy-induced, we believe the central bank is unlikely to use demand management policy and raise interest rates to fight inflation,” RHBRI said in a release yesterday. Investment research firm RAM Holdings Bhd’s Dr Yeah Kim Leng had predicted the highest CPI rise at 0.4 percentage point, and also warned of a “second round” inflation effect resulting from the fuel pump price hike. “That’s why there’s a need to ensure that businesses and traders don’t take advantage by increasing prices beyond levels that is considered justifiable,” added Yeah, who is also RAM Holdings’ chief economist. However, he explained that an interest rate hike is unlikely since the public’s demand for the goods and services appears to be easing off. “Based on the second quarter (economic) growth, the demand pressure is not excessive, that’s why we don’t see any build-up, any spending spree in demand pressure that will result in higher inflation that may trigger Central Bank rate hike,” he said. In an earlier interview in July, Lee had predicted that the overnight policy rate (OPR), a benchmark rate set by the central bank, will start to move next year by around 25 basis points. The OPR has stayed at three per cent since March 2011 but any change will affect other rates, such as the base lending rate (BLR) and foreign exchange rate. Analysts have pointed out that with current sluggish domestic demand and rising inflation rate, BNM may move to intervene. Putrajaya’s decision yesterday to raise fuel price for the first time since 2010 was made as part of its move to consolidate its fiscal position, and reduce the federal government current account deficit-to-GDP ratio to 3 per cent by 2015. Prime Minister Datuk Seri Najib Razak also stressed the need for a healthy current account balance, especially after global ratings agency Fitch Ratings revised Malaysia’s sovereign debt outlook from “Stable” to “Negative” last month. Fitch commented yesterday, however, that Putrajaya’s measures to lower subsidies are not enough to alter its negative outlook on Malaysia’s A- sovereign rating. Instead, the ratings agency said sustained reforms and a broadening of the revenue base through a goods and services tax (GST) would make a difference to the country’s credit profile. dlvr.it/3vj1dr
Posted on: Wed, 04 Sep 2013 08:48:38 +0000

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