Malaysia's central bank Governor ZetiAkhtar Aziz said soaring food and energy prices may hurt household spending and damp economic growth, slowing expansion in 2008 to below its March forecast.
“The important consideration in this scenario is to sustain domestic demand,'' Zeti said in an interview yesterday in Basel, Switzerland. The economy may grow between 4.5 percent and 5 percent this year, she said, citing “preliminary'' estimates. The central bank in March forecast expansion of 5 percent to 6 percent.
Slowing growth may make it harder for Malaysia to follow Vietnam, Indonesia and the Philippines in raising borrowing costs this year to tame inflation, even as oil doubled to a record $142.99 a barrel on June 27 and rice and wheat reached unprecedented levels.
“Bank Negara Malaysia does not want to be trigger-happy cowboys shooting straight from the hip at the very first sign of danger,'' said Suhaimi Ilias, an economist at Aseambankers Malaysia Bhd. who expects the central bank to hold rates steady until year-end. “They want to carefully assess the impact on growth and inflation.''
Bank Negara, which kept its overnight policy rate at 3.5 percent for a 17th straight meeting in May, isn't scheduled to review borrowing costs until the end of July.
Malaysia's ringgit fell today, heading for its first quarterly loss since September 2006, on concern that higher oil prices will stoke inflation and restrain growth.
Surging prices amid slowing expansion is complicating economic management for Prime Minister Abdullah Ahmad Badawi as he faces calls to step down after leading the ruling coalition to its worst election result in March general elections.
Malaysia may revise its 2008 budget deficit estimate, Second Finance Minister Nor Mohamed Yakcop said today, after the government last week announced a 15 percent increase in its development spending amid soaring costs. The government will announce its forecasts for growth on August 29, he said.
“Malaysia's major exports are electronics and electrical goods and global demand has been waning,'' said Joanna Tan, an economist at Forecast Singapore Pte paydayloan. “We expect some support from the commodities sector and that will help buffer to a certain extent. It is possible for them to meet their growth forecast.''
Malaysia's inflation may reach a nine-year high of 5 percent this month after the government lifted retail gasoline and diesel prices to trim subsidies used to keep domestic costs low, Zeti has said.
“What we have to monitor very closely is what is the impact on wages and to what extent these prices, increasing costs, are passed on to consumers,'' Zeti said in Basel, where she's attending a meeting of central bankers at the Bank for International Settlements. “When that becomes clear, a necessary response will be based on these considerations.''
Malaysia won't use the exchange rate to counter inflation, because the currency market is “too volatile,'' Zeti said.
The central bank this month raised its 2008 average inflation forecast to 4.2 percent from a March estimate of as much as 3 percent, causing some economists to predict a rate increase in July or earlier.
“Malaysia needs to get a grip on inflation after the price hikes,'' said Tan at Forecast, who expects the central bank to raise rates next month. “There's also concern that investor sentiment will be weighed by the ongoing political developments and that is another challenge.''
Second Finance Minister Nor said June 24 that inflation in Malaysia is being driven by rising costs rather than demand, so higher interest rates won't necessarily cool price pressures.
A “careful balance will be made in determining the interest-rate policy,'' Zeti said. While rising prices will have a “significant'' impact on inflation in the short term, “this does not mean that it's going to result in significant, persistent price increases going forward.''
Higher prices will reduce household purchasing power, and may have a “moderating impact'' on prices, she added.