Inflation rate may reach 3.2% next year

by **Cals** Wed 16 Oct 2013, 13:48

Business & Markets 2013

Written by Zatil Husna Wan Fauzi of theedgemalaysia.com

Wednesday, 16 October 2013 09:54

KUALA LUMPUR: The country’s inflation rate is expected to reach between 2.8% and 3.2% on the back of more subsidy reduction that is expected to take place as early as the middle of next year, according to economists.

In the latest round of subsidy rationalisation, the government reduced subsidies for RON95 petrol and diesel by 20 sen a litre in a bid to slash its fuel subsidy bill by an estimated RM3.3 billion annually.

Following the fuel subsidy reduction, RAM Rating’s chief economist Yeah Kim Leng expects the inflation rate to rise by 0.4% to 0.5% from September onwards.

“We also see that the rationalisation of subsidy will continue to push the inflation rate higher to an average of 2.3% this year,” he told The Edge Financial Daily.

Yeah expects the consumer price index (CPI) to increase by between 2.8% and 3% next year.

“It’s still too early to judge the export optimism, taking into account that Malaysia’s currency has depreciated over the last month.

“But, the expectation right now is that the global economic growth will be better next year,” Yeah added.

He said that there is a possibility of an interest rate hike by Bank Negara Malaysia (BNM) in the second half of next year (2HFY14) on the back of increased inflationary pressures.

Yeah added that Malaysia’s GDP growth for next year is forecastat 5.5% from a projected 4.8% growth for this year, based on the combination of stronger export demand and sustainable domestic growth.

Be as it may, Yeah believes the key to growth is higher domestic and foreign investments.

Alliance Investment Bank Bhd’s chief economist Manokaran Mottain said inflation rate could reach 3.2% next year on the back of economic reforms by the government and more subsidy cuts.

“We see the year’s inflation rate to be at 2.5% and we are expecting another subsidy cut before the year-end,” he said, adding that the current inflation rate is at about 1.9%.

BNM governor Tan Sri Dr Zeti Akhtar Aziz said the Malaysian economy is on track for a 4.5% to 5% expansion this year, as domestic demand holds up and exports recover, predicting higher growth next year.

Zeti’s confidence came from the recent export numbers that have taken a positive turn, with an optimistic outlook for the country if the trend continues upward.

Malaysia, Southeast Asia’s third largest economy, has posted average 6% growth in the years through 2012 due to domestic demand and investments.

Zeti said the ringgit has been relatively stable compared with other currencies and should appreciate over time if the country’s underlying fundamentals remain strong.

This article first appeared in The Edge Financial Daily, on October 16, 2013.