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Malaysia February CPI Above View; May Rate Hike Possible
Malaysia Perspective | 01 April 2011

Malaysia’s consumer prices in February rose at a quicker-than-expected pace, further increasing the likelihood the central bank will raise interest rates at its next meeting in May to keep inflationary pressure in check.

The consumer price index climbed 2.9% in February from a year earlier primarily because of higher food prices, and increased 0.5% compared with the previous month, data from the Department of Statistics showed.

Eleven economists polled by Dow Jones Newswires had expected consumer prices to have risen a median 2.6% on year. In January, the index increased 2.4% on year while in December it grew 2.2%.

The government agency said February’s increase was mainly caused by a 4.7% on-year rise in the subindex for food and non-alcoholic beverages, and a 4.5% rise in that for transport. Also contributing to the overall increase was the subindex for housing, water, electricity, gas and other fuels, which grew 1.2% from a year earlier.

The on-month index gain was brought about primarily by a 1.1% rise in the food and non-alcoholic beverages subindex.

Action Economics director, David Cohen, said that the growing inflationary pressure in February was not entirely unexpected due to higher oil and commodity prices. However, the acceleration in the increase could be a concern and may be one of the triggers for the central bank to raise rates earlier rather than later.

“I think Bank Negara will be watching these number very closely, and suspect we’ll be seeing a tightening (in May) in an effort to contain the rise,” he said.

Most economists expect the central bank to raise rates this year by another 50 basis points. The central bank last changed its policy rate in July last year, raising it by a quarter of a percentage point to 2.75%. The next policy rate setting meeting is on May 5.

Alvin Liew, an economist at Standard Chartered Bank in Singapore, said ahead of the data that robust domestic demand and higher wages in Malaysia are likely to continue putting upward price pressures on major categories in the CPI basket.

“The accelerating inflation environment, not just in Malaysia, but also the broader region, will keep the market focused on central bank policies. Inflation will remain a key challenge for Asia, including Malaysia, in 2011 and 2012,” he said.

The central bank projects the country’s inflation to be 2.5% to 3.5% this year, up from 1.7% in 2010, driven mainly by commodity and energy prices, which have increased sharply due to multiple external factors such as changes in global demand and adverse weather conditions.

Bank Negara said in its annual report published earlier this week that if price pressures become entrenched and are reinforced by domestic factors, “monetary policy may need to be adjusted to ensure that inflation doesn’t accelerate to levels that could undermine economic activity and erode economic welfare.”

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