FW: Malaysia's Inflation Jumps to 26-Year High on Fuel

 

Malaysia's Inflation Jumps to 26-Year High on Fuel (Update2)

By Stephanie Phang and Ranjeetha Pakiam

July 23 (Bloomberg) -- Malaysia's inflation accelerated to a 26-year high in June after the government increased fuel prices, spurring speculation the central bank will raise interest rates for the first time since April 2006.

Consumer prices rose 7.7 percent from a year earlier, after a 3.8 percent gain in May, Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad told reporters today in Putrajaya, outside Kuala Lumpur. Inflation may stay above 7 percent in July, the minister added.

Malaysia may be forced to join neighboring Thailand and Indonesia in raising borrowing costs amid soaring oil and food prices, even as a U.S. slowdown threatens the region's economic expansion. Asian central banks need ``decisive tightening'' of monetary policies to combat inflation, the Asian Development Bank said yesterday.

``There are merits to considering upward adjustments to the monetary policy, no matter how small, just to contain heightened inflation expectations and to address the huge negative real interest rates,'' said Azrul Azwar Ahmad Tajudin, an economist at Bank Islam Malaysia Bhd. in Kuala Lumpur.

Bank Negara Malaysia, which has kept its policy rate at 3.5 percent for 17 straight meetings, may raise borrowing costs at its next review on July 25, according to 12 of 20 economists surveyed by Bloomberg News. The central bank may increase its inflation forecast for this year to 6 percent, Shahrir said, without elaborating.

`50-50 Chance'

The last time inflation was above 6 percent was June 1998, when the central bank's then benchmark three-month intervention rate was 11 percent. Malaysia's overnight policy rate, introduced in April 2004, is the second lowest in Asia according to Bloomberg data, together with Hong Kong's and Thailand's benchmark rates.

There's a ``50-50 chance'' that the central bank will raise interest rates this week, and if it doesn't, an increase at the next meeting in August is ``a foregone conclusion,'' Azrul said.

Thailand, the Philippines and Indonesia raised their benchmark rates in July, with Indonesia doing it for a third straight month, and India boosted borrowing costs twice in June. In Vietnam, the central bank raised its base rate to 14 percent last month, the highest in Asia.

Prime Minister Abdullah Ahmad Badawi announced a 41 percent increase in retail gasoline prices last month in a bid to trim government subsidies that keep pump costs artificially low as crude oil soared. Diesel prices went up 63 percent, and electricity rates rose in July.

Transport, Food

Price gains last month were led by a 20 percent jump in transport costs, the third-biggest component in the consumer price index. Housing and utility prices, the second-largest contributor, climbed 1.1 percent from a year earlier.

Food and beverages, the biggest component in the index, gained 10 percent, and alcohol and tobacco costs rose 9.2 percent. The price of rice, bread and other cereals surged 24 percent, and milk, cheese and eggs were 13 percent costlier.

Malaysia may be able to ease gains in food prices if the Southeast Asian nation improved delivery systems, especially in rural areas, Shahrir said today.

Shahrir said he would be proposing to the government that it increase the number of essential products with controlled prices. It was also ``about time'' that the basket of goods used to compile the consumer price index was reviewed, he said.

Prices at restaurants and hotels increased 6.7 percent, while the cost of recreation services and culture added 0.8 percent, according to today's report.

Consumer prices increased 3.7 percent in the first half of the year. Economists were expecting June's inflation rate to climb to 6.6 percent.

To contact the reporters on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net; Stephanie Phang in Kuala Lumpur at sphang@bloomberg.net;

Last Updated: July 23, 2008 05:56 EDT