Business

Tuesday July 1, 2008

Zeti: Rising prices may hurt spending, slow expansion


BASEL: Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said soaring food and energy prices may hurt household spending and damp economic growth, slowing expansion in 2008 to below its March forecast.

Tan Sri Dr Zeti Akhtar Aziz

“The important consideration in this scenario is to sustain domestic demand,” Zeti said in an interview on Sunday.

The economy may grow between 4.5% and 5% this year, she said, citing “preliminary” estimates. Bank Negara in March forecast expansion of 5% to 6%.

Slowing growth may make it harder for Malaysia to follow Vietnam, Indonesia and the Philippines in raising borrowing costs this year to tame inflation, even as oil doubled to a record US$142.99 a barrel on June 27 and rice and wheat reached unprecedented levels.

“Bank Negara does not want to be trigger-happy cowboys shooting straight from the hip at the very first sign of danger,” said Suhaimi Ilias, an economist at Aseambankers Malaysia Bhd who sees central bank to hold rates steady until year-end.

Bank Negara, which kept its overnight policy rate at 3.5% for a 17th straight meeting in May, isn’t scheduled to review borrowing costs until end-July.

Malaysia’s inflation may reach a nine-year high of 5% this month after the Government lifted retail gasoline and diesel prices to trim subsidies used to keep domestic costs low, 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 here, where she’s attending a meeting of central bankers at the Bank for International Settlements. “When that becomes clear, a response will be based on these considerations.”

Malaysia won’t use the exchange rate to counter inflation as the currency market was “too volatile,” Zeti said.

A “careful balance will be made in determining the interest-rate policy,” Zeti said. While rising prices 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.”

Higher prices will reduce household purchasing power, and may have a “moderating impact” on prices, she added. – Bloomberg_


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