Malaysia Inflation Rate May Have Reached 26-Year High

By Ranjeetha Pakiam

July 21 (Bloomberg) -- Malaysia's inflation rate may have reached a 26-year high after the government raised fuel prices, adding pressure on the nation's central bank to raise interest rates this week.

Consumer prices may climb 7 percent ``or even higher'' this month after a similar gain in June, Second Finance Minister Nor Mohamed Yakcop said today in Kuala Lumpur. That would be the fastest pace since January 1982, according to Malaysia's statistics department.

Neighboring Thailand and Indonesia have raised borrowing costs to offset the effect of soaring oil and food prices. A 41 percent increase in gasoline prices in June has kick-started price gains in Malaysia, where the central bank has kept its key interest rate unchanged since April 2006 to boost growth.

A ``monetary policy response will be needed to set inflation expectations on the right course,'' said Irvin Seah, an economist at DBS Bank Ltd. in Singapore. The situation is ``clearly beyond the comfort zone of the central bank.''

Bank Negara Malaysia is due to announce its monetary policy decision in Kuala Lumpur on July 25. The overnight policy rate is currently 3.5 percent.

Still, price increases for this month and in June may be ``one-off'' gains, Nor told reporters. Inflation for the year won't be more than 5 percent, he said.

``There's no reason to believe it will be repeated in following years,'' Nor said.

The minister said Malaysia's economic growth for 2008 should be about 5 percent, at the lower end of a 5 percent-to-6 percent range given by the central bank in March.

To contact the reporter on this story: Ranjeetha Pakiam in Kuala Lumpur at rpakiam@bloomberg.net