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Malaysia Central Bank Expects 5-6% GDP Growth In 2011; Flags Inflation Risk
Malaysia Perspective | 01 April 2011

Malaysia’s central bank forecast the economy to grow between 5.0% and 6.0% this year – slower than 2010′s 7.2% expansion – and warned of growing risks from inflation, which reinforces the view that interest rates may be raised as early as May, when its next policy rate meeting will be held.

Bank Negara Malaysia Governor Zeti Akhtar Aziz told reporters at a news conference that the growth forecast is achievable, with the upper end of the target likely attainable if all the infrastructure projects announced, such as the mass rapid transit and rail extensions are implemented, and if there are no destabilising external factors.

“Right now, Malaysia is firmly on a steady growth path and can achieve its GDP growth forecasts going into the future because it has the economic fundamentals to adjust into new areas of growth,” Zeti said.

The central bank’s economic growth forecast is in line with the government’s previously announced expectation of 5.0% to 6.0% expansion for this year.

Zeti also said the developments in Japan and the Middle East and North Africa won’t affect the country’s gross domestic product growth forecast because these uncertainties have been priced in.

She stressed growth will primarily be driven by domestic demand, which hasn’t seen any slowdown in the first quarter. “Domestic demand growth is still very positive,” she said, adding that it should help the country to absorb any external shocks.

Zeti said that the GDP growth forecasts assume an average crude oil price of US$90 to US$100 a barrel but cautioned that economic growth will be affected if oil prices stay above US$150 a barrel for a prolonged period.

In its 2010 annual report, the central bank projected the country’s consumer price index to rise between 2.5% and 3.5% this year, much faster than the 1.7% increase in 2010.

“Inflation remains manageable and the forecast has taken into account the impact on consumption due to high food and energy prices. At this point of time, it is not a concern but we will monitor closely to see if high commodity and energy prices will be permanent,” she said.

She stressed the need to have “macroeconomic stability”, especially price stability, for sustained growth.

Tightening In May Likely
Bank of America-Merrill Lynch economist Chua Hak Bin said the signals were clear that Bank Negara is increasingly concerned about inflationary risks. Chua’s forecast is for inflation to breach 3.0% by the second quarter, given the fast-rising commodity and energy prices.

“This raises the odds that Bank Negara will resume tightening from the May policy meeting, after a long pause,” said Chua, who projects the country’s policy rate to reach 3.25% by the year’s end. The central bank last changed its policy rate in July last year, raising it by a quarter of a percentage point to 2.75%.

Action Economics director, David Cohen, said that although gains in Malaysia’s consumer price index have remained relatively modest, the trend is a rising one. “There’s no doubt that inflation has picked up, and (the next meeting in May) could be a convenient time to tighten further,” he said.

Consumer prices in January rose 2.4% on year, higher than a 2.2% rise in December. The increase in prices is set to accelerate, with 11 economists polled by Dow Jones Newswires expecting the consumer price index to rise 2.6% on year in February.

RHB Research said in a report that rising inflationary pressure and disruptions from Japan’s earthquake and tsunami disaster have increased the downside risk to growth. “We expect the slowing growth trend to persist into the first half of 2011, but the economy will likely gain momentum and bounce back in the second half of the year,” the house said.

Economic growth in the second half of the year may be supported by domestic demand and the implementation of projects under the country’s Economic Transformation Program as well as reconstruction work in Japan.

Bank Negara said in its annual report that domestic demand is forecast to grow 6.7% this year, faster than the 6.3% expansion in 2010.

Private consumption, which is projected to rise by 6.9% this year compared with 6.6% in 2010, is expected to continue being a main contributor to growth, supported mainly by favorable labour-market conditions, rising disposable income and sustained consumer confidence, the central bank said.

The central bank also said it sees all economic sectors expanding in 2011. The services sector will remain the largest contributor with a projected growth rate of 5.9%, moderating from a 6.8% increase in 2010.

The manufacturing sector, it said, will grow at a more moderate pace of 5.7% this year given a high base of comparison in 2010, when the sector grew 11.4%.

Bank Negara projects growth in the country’s gross exports to moderate to 5.4% this year from 15.6% in 2010, and imports to cool to 5.7% from 21.7%.

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