Malaysia's oil price hike may push inflation to 3%

by **Cals** Wed 04 Sep 2013, 07:22

Published: Wednesday September 4, 2013 MYT 12:00:00 AM
Updated: Wednesday September 4, 2013 MYT 6:55:31 AM
Malaysia's oil price hike may push inflation to 3%
BY INTAN FARHANA ZAINUL
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Jala: The country’s inflation would remain below 3% only if businesses decide not to take advantage of the situation.

PETALING JAYA: The increase in pump prices, despite helping to ease the country’s fiscal situation, might lead to a 3% spike in inflation rates this month.
Economists expect inflation to increase by between 3% and 4% until the end of the year from 2% in July. However, the overall inflation for 2013 should remain at a moderate pace of 2.0% to 2.5% on the back of the lower inflation of 1.7% recorded during the first seven months of the year.
Minister in the Prime Minister’s Department Datuk Seri Idris Jala said the country’s inflation would remain below 3% until the end of the year, and that the Government had chosen the right time to make the change, calling it the “fiscally right thing to do”.
“The country’s inflation would remain below 3% only if businesses decide not to take advantage of the situation. So far, I think it is still within a reasonable quantum,” he said at a press conference at the 5th National Energy Forum.
He added that the Government, via the central bank, had conducted several studies on the impact of the fuel price hike to ensure it would not burden the rakyat.
On Monday, Prime Minister Datuk Seri Najib Tun Razak announced the Government’s decision to increase the price of RON95 and diesel by 20 sen to RM2.10 and RM2 per litre, respectively, effective yesterday, as one of its measures to rationalise subsidies.
This is the first time since 2010 that the Government has hiked up fuel prices. It expects to save RM1.1bil this year from September to December and RM3.3bil per year in subsidy bills from the exercise, helping to tame the fiscal deficit. The Government has targeted to reduce budget deficit to 4% this year, 3.5% in 2014 and 3% by 2015.
“As in the past, the impact on inflation is expected to be one-off and the pass-through effect is not likely to be strong,” said RHB Research in a report, adding that the Government could raise the fuel price again in six to nine months and twice in 2014.
Despite the increase in inflationary pressure, RHB Research said Bank Negara was likely to maintain the overnight policy rate at 3% due to downside risks on economic growth from a weak external environment.
RAM Holdings Bhd chief economist Dr Yeah Kim Leng told StarBiz that the pass-through effect from the petrol hike should not exceed 0.4%, and that the favourable domestic economic environment was likely to hamper a similar price increase by companies.
“It depends on the industry. Certain industries face higher competition and some do not, which would give them the power to pass on the cost to consumers. But based on our calculation, it should not be more than 0.4%.
“The weakening of the ringgit would increase exports and help to compensate higher production cost caused by the rise in the fuel price,” he added.
CIMB Investment Bank chief economist Lee Heng Guie said in a report the hike in the fuel price may hurt consumers and businesses, but that the overall impact should be manageable.
“We think a gradual implementation would help spread out the pain of adjustment for consumers and businesses,” he said.
Meanwhile, AmBank Group chief economist Anthony Dass said the increase in fuel prices would have some degree of dampening impact on economic growth, mainly from slower consumer spending, which might affect several economic sectors including property, banking and construction materials.
“We expect households to postpone buying big-ticket items and we envisage some degree of pass-through effects, following higher transportation costs, on to economic development activities such as construction materials,” he said.
However, Fitch Ratings remarked yesterday that the fuel subsidy reduction was “too small” to alter its “negative” outlook on Malaysia’s A- sovereign rating.