Malaysia's Zeti Says Soaring Prices May Damp Growth

By Nipa Piboontanasawat

June 30 (Bloomberg) -- 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. ``If this is sustained then we would indeed have the potential to realize growth between 4.5 percent and 5 percent, but this is still very preliminary.''

The central bank in March forecast economic expansion of 5 percent to 6 percent this year after growth of 6.3 percent in 2007. Surging food and oil prices have forced neighboring Vietnam, Indonesia and the Philippines to raise borrowing costs this year to tame inflation, which is threatening growth.

Bank Negara Malaysia, which kept its overnight policy rate at 3.5 percent for a 17th straight meeting in May, isn't scheduled to review rates until the end of July. Malaysia's inflation rate may reach a nine-year high of 5 percent this month after the government lifted retail gasoline and diesel prices, 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.

Rate Increase

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.

A ``careful balance will be made in determining the interest-rate policy,'' Zeti said. While the increase in costs 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.''

Second Finance Minister Nor Mohamed Yakcop 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 large component of expenditure by households is for food and energy,'' Zeti said yesterday. Higher prices ``leads to a contraction in their purchasing power, and therefore this in itself will have a moderating impact on prices.''

To contact the reporter on this story: Nipa Piboontanasawat in Basel at npiboontanas@bloomberg.net