Malaysia Cuts Fuel Prices Ahead of Schedule as Inflation Soars

By Stephanie Phang and Ranjeetha Pakiam

Aug. 22 (Bloomberg) -- Malaysia cut fuel prices earlier than planned after inflation accelerated to the fastest pace in more than 26 years in July and threatened to further stoke public discontent against the government.

``The Cabinet decided to hasten the implementation of the new petrol-price adjustments today,'' Prime Minister Abdullah Ahmad Badawi said in a release today. ``This decision was made after taking into account the decline in global oil prices in recent weeks and the increase in the inflation rate in July.''

Consumer prices rose 8.5 percent from a year earlier, after a 7.7 percent gain in June, Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad told reporters today in Putrajaya. Economists were expecting a 7.8 percent increase.

Voter anger over rising prices contributed to opposition gains in March elections that deprived Prime Minister Abdullah Ahmad Badawi of his two-thirds majority in parliament. Former deputy premier Anwar Ibrahim will run for a seat in a by-election next week in a bid to return to the legislature for the first time in a decade and oust the government.

``Undoubtedly, inflation is adding to the woes of the government,'' said Kit Wei Zheng, an economist at Citigroup Inc. in Singapore. ``This is not helped by the fact that at least some of the current inflation pressures are perceived to be inflicted by government policies.''

Thousands gathered at a July 6 rally to protest a 41 percent increase in retail gasoline prices the government announced in June to trim subsidies that keep pump costs artificially low. Diesel prices went up 63 percent at the same time, and electricity rates rose in July.

Fuel Prices

Abdullah today announced a 5.6 percent cut in gasoline prices and a 3.1 percent reduction in diesel costs effective tomorrow, bringing forward a plan to start monthly adjustments in September that would fix local gasoline prices at 30 sen (9 U.S. cents) below market rates per liter.

RON97 gasoline will cost 2.55 ringgit a liter tomorrow, down 15 sen, and diesel will be priced at 2.50 ringgit a liter, 8 sen cheaper than the current price. The price of gasoline won't exceed 2.70 ringgit a liter this year, Abdullah said.

The move will have an impact on inflation in the coming months, Shahrir said. The Cabinet sped up the fuel-price cut to help ease the burden of consumers and reduce inflationary pressure, Abdullah said.

The cut in fuel prices will help to ``stabilize'' the inflation rate in August and September and reduce pressure on the central bank to raise interest rates, Ho Woei Chen, an economist at United Overseas Bank Ltd., said in a note after the announcements today.

Monetary Policy

``We now expect Bank Negara Malaysia to maintain its overnight policy rate at 3.5 percent at the August meeting despite the surge in inflation in July,'' Ho said. With the reduction in fuel prices, ``it is even more unlikely that Bank Negara will hike its interest rates after failing to do so earlier.''

Eight of the 12 economists surveyed by Bloomberg News expect the central bank to keep its benchmark interest rate unchanged on Aug. 25.

Bank Negara, which hasn't raised borrowing costs since April 2006, unexpectedly refrained from increasing the overnight policy rate last month, saying its immediate concern is to avoid a ``fundamental economic slowdown'' even as it raised this year's inflation forecast to a range of 5.5 percent to 6 percent. Slowing growth amid a weakening global economy will cause inflation to ease in the second half of 2009, it said.

In keeping the key rate at 3.5 percent, Bank Negara broke with central banks in neighboring Singapore, Thailand, Vietnam, Indonesia and the Philippines, all of whom have tightened monetary policy this year to fight soaring oil and food prices.

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