Business

Wednesday July 30, 2008

Bank Negara may act on price increases


Another round of hikes may trigger ‘monetary response,’ says Zeti

XI’AN: Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said another round of price increases may trigger a “monetary response” after inflation surged to a 26-year high last month.

“Our concern at this stage would be the generalised second-round effect of price adjustments, which would prompt a monetary response,” Zeti said in an interview yesterday after a meeting of East Asia-Pacific central bankers. She wouldn’t specify possible measures.

So-called second-round increases occur when one price gain leads to others. Malaysia last month raised gasoline and diesel prices after oil surged to records, a move that Zeti said was likely to be “deflationary” in the longer term by subduing domestic demand.

The central bank unexpectedly kept its overnight policy rate at 3.5% for an 18th straight meeting on July 25, refraining from following its Asian counterparts in raising borrowing costs to fight inflation as it focused on sustaining growth. Bank Negara next meets to review rates Aug 25.

“The central bank has not completely forgotten about the risk of higher inflation,” said Tai Hui, head of South-East Asian economic research at Standard Chartered in Singapore. “They’re still adopting the wait-and-see approach. The comments today are a good reminder that they’re not completely against acting if needed.”

Bank Negara would probably keep interest rates steady “in the near term,” said Hui, who had accurately predicted the central bank’s decision to keep borrowing costs on hold last week.

The central bank has emphasised the risks to growth and the impact on inflation, he said.

Economic growth this year would be “at least 5%,” Zeti said, citing the low end of a central bank estimate in March. Last year’s expansion was 6.3%. Growth may moderate in the next 12 months, she said, declining to provide an estimate.

“The banking industry is still resilient with steady lending growth,” Zeti said.

“Our reserves level is very strong, there’s low external indebtedness, we’ve a diversified economic base and we’re a net exporter of oil and commodities.”

The government was due to release an economic forecast on Aug 29 with its 2009 budget, she said.

“If the public and private sectors can manage this challenging period well, conditions in the second half of 2009 will improve considerably, with lower inflation and a resumption in growth,” Zeti said. Still, “the external environment is less favourable, with commodity and energy prices at elevated levels.”

Inflation may slow to 4% in the second half of next year, Zeti said.

That compares with 7.7% last month and the central bank’s estimate of 5.5% to 6% for 2008. – Bloomberg

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