Malaysian Inflation Exceeded 6% in June, Zeti Says

By Soraya Permatasari

July 9 (Bloomberg) -- Malaysia's central bank said inflation probably exceeded 6 percent in June, higher than earlier estimated and bolstering expectations it will raise interest rates as early as this month.
``While domestic inflation is expected to remain elevated for the remaining part of this year and early next year, it is expected to moderate in the second half of 2009,'' Governor ZetiAkhtar Aziz said in a speech in Kuala Lumpur today.

Record crude prices forced Prime Minister Abdullah Ahmad Badawi to announce a 41 percent increase in petrol prices and 63 percent jump in diesel costs in June, and allow higher electricity rates this month. Surging food and oil prices have already prompted neighboring Indonesia and the Philippines to raise borrowing costs this year to tame inflation.

``There's little that they can do but to increase rates,'' said Gundy Cahyadi, an economist at Ideaglobal in Singapore. ``The concern is if they don't do that, the market's confidence on Malaysian inflation is going to be hurt.''

The central bank had estimated last month that the fuel price increases would cause inflation to accelerate to 5 percent in June. The last time the inflation rate was above 6 percent was June 1998, when the central bank's then benchmark three- month intervention rate was 11 percent.

Bank Negara Malaysia, which kept its overnight policy rate at 3.5 percent for a 17th straight meeting on May 26, next meets on July 25.

Lasting Impact

The impact of higher fuel prices on inflation will be ``quite lasting'' and may not ease until the later part of 2009, said Cahyadi, who expects the central bank to raise its benchmark rate by half a percentage point to 4 percent this year.

The ringgit climbed to 3.2490 per dollar as of 12.22 p.m. in Kuala Lumpur from 3.2615 late yesterday, according to data compiled by Bloomberg.

``We have to evaluate the risks to inflation,'' Zeti told reporters after her speech. ``We will look for signs of second- round effects and these are whether there are pressures for wage adjustments to take place and whether there are other secondary price increases.''

The central bank will also evaluate the risks to growth from a potential further slowdown in the external environment, and watch for a ``deflationary impact arising from higher energy prices on the economy,'' she said.

The central bank may not raise borrowing costs if inflation stayed below 7.5 percent in June, said Alvin Liew, an economist at Standard Chartered Plc in Singapore, who expects Bank Negara to keep interest rates on hold this year to avoid hurting domestic demand and investment.

``If we see inflation in June going up towards double digits, then the risk is that they might have to hike rates,'' Liew said. ``However, the probability for that is very low.''

To contact the reporter on this story: Soraya Permatasari in Kuala Lumpur at soraya@bloomberg.net