Economy Affin sees Govt cutting petrol subsidy again next yr, Inflation to be 3%

by **Cals** Tue 26 Nov 2013, 05:05

Economy Affin sees Govt cutting petrol subsidy again next yr, Inflation to be 3%

Business & Markets 2013

Written by Jeffrey Tan of theedgemalaysia.com

Monday, 25 November 2013 15:34

KUALA LUMPUR (Nov 25): Inflation is expected to trend higher and average around 3.0% in 2014, according to Affin Investment Bank Research.

The official forecast us at 2.0%-3.0%.

In a note today, the research house said next year it expects the government to reduce petrol and diesel subsidies gradually in early part of 2014.

Affin IB economist Alan Tan said the secretary general to the Ministry of Energy, Green Technology and Water, Datuk Loo Took Gee was quoted by the media saying the government may cut fuel subsidies for power producers early next year.

“According to estimates, electricity tariff could rise by as much as 19%, from 33.5 sen per kwh to 40 sen per kwh, if all the subsidies are to be removed,” said Tan.

“Cost of electricity accounts for a weight of 2.9% in the CPI basket.”

Tan noted in October this year, the country’s headline inflation rose further to 2.8% year-on-year (y-o-y) from 2.6% in September.

He remarked that this is the highest level since December 2011, due mainly to the 14% increase of tobacco excise tax in early last month. Prices of alcoholic beverages & tobacco accelerated to 16% y-o-y in October from 4.5% in September.

“Excluding food prices, core inflation rose sharply to 2.3% y-o-y in October from 1.9% in September, where the increase was attributed mainly to rising transport and tobacco costs,” Tan said, adding it is the highest level since November 2010.

However, he said despite the government abolishing subsidy on sugar, prices of food and non-alcoholic beverages (largest component of CPI at 30.3%) moderated slightly to 3.7% y-o-y in October from 3.9% in September.

Meanwhile, Tan mentioned Bank Negara Malaysia would likely maintain its current accommodative policy stance to support domestic demand in the near term, reflecting the view of inflation risks going forward.

“But, we expect some normalisation of overnight policy rate, possibly towards the 2H 2014,” he said.

“We believe the policy rate could rise by 25 to 50 basis points to 3.25%-3.5% by next year end from the current 3%.”

He said this is if domestic economic conditions improve significantly next year, in tandem with a stronger global economic recovery.