News and Finance

Malaysia's inflation accelerated to a 22-month high on rising food and transport costs, stoking speculation the central bank will increase interest rates.

Consumer prices rose 3.8 percent in May from a year earlier, after a 3 percent gain in April, Domestic Trade and Consumer Affairs Minister Shahrir Abdul Samad told reporters today in Putrajaya, outside Kuala Lumpur. June's inflation rate will be higher though it's unlikely to be “double-digit,'' he added.

“The mercury level is rising,'' said Irvin Seah, an economist at DBS Group Holdings Ltd. in Singapore. “Monetary policy action will be needed'' to contain inflation expectations and tame prices.

Central banks across Asia are raising interest rates to quell spiraling inflation amid record food and oil prices. Bank Negara Malaysia, which has kept its policy rate at 3.5 percent for 17 straight meetings, may be forced to raise borrowing costs on or before its next review on July 25, Seah said.

Asian governments need to consider increasing interest rates and other measures to cool inflation, which is becoming the biggest risk to economic growth in the region, the Asian Development Bank said on June 15. Vietnam, India, Indonesia and the Philippines all raised interest rates this month. Singapore has allowed its currency to strengthen to contain prices.

Malaysia's inflation rate may reach a nine-year high of 5 percent this month after the government raised fuel prices, central bank Governor Zeti Akhtar Aziz said on June 5. Bank Negara may use interest rates to tame inflation if there is a “generalized'' increase in prices, though it has no plans to hold an unscheduled policy meeting, she said this week.

`Anchoring Expectations'

“It may not be necessary to consider a monetary policy response'' if inflation eases in the second half of 2009 as the central bank expects, Zeti said on June 16 creditreports. “But important in monetary policy is anchoring expectations, because this in itself will fuel further price increases and we want to contain that at a very early stage.''

Prime Minister Abdullah Ahmad Badawi announced a 41 percent increase in retail gasoline prices this month in a bid to trim government subsidies that keep pump costs artificially low as crude oil soars. Diesel prices went up 63 percent, and electricity rates will rise in July.

“It's probably quite a dicey situation for the central bank,'' said Gan Kim Khoon, head of equities at OSK Investment Bank Bhd. in Kuala Lumpur, in a Bloomberg Television interview today. “There certainly is some pressure on the central bank of Malaysia to raise interest rates because of the outlook for inflation.''

Costlier Rice

Gan expects inflation to accelerate starting in July because of the increase in fuel costs, with price gains peaking at 4.4 percent to 4.5 percent in the first quarter of 2009. That would mean depositors, who earn about 3.3 percent now, are losing money on their savings and “that will be quite unpalatable for the man in the street,'' he said.

Price gains last month were led by an 8.2 percent rise in food and beverages, the biggest component in the index, and a 9.2 percent jump in alcohol and tobacco costs from a year earlier. The price of rice, bread and other cereals surged 18.8 percent, and milk, cheese and eggs were 12.8 percent costlier.

Transport costs, the third-biggest component in the consumer price index, rose 0.9 percent in May from a year earlier, and housing and utility prices, the second-largest contributor, gained 1.5 percent. Prices at restaurants and hotels increased 7.1 percent, while the cost of recreation services and culture added 2.8 percent.

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