M'sia CPI seen rising 3% following electricity tariff increase

KUALA LUMPUR: Businesses and households can expect costs to go up, as inflation trends higher in the wake of the new electricity tariffs effective Jan 1 for the peninsula as well as Sabah and Labuan.

Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz said an early estimate showed that there could be a 0.4% increase in the consumer price index (CPI), which measures headline inflation, including volatile food and energy costs, when the new electricity rates become effective.

Sarawak is not affected by the hike as its power supply and distribution are managed by state-owned Sarawak Energy Bhd. The state has a separate enacment on electricity production.

Economists expect inflation to rise above 3% next year after picking up pace in recent months, as the Government consolidates spending with cuts in subsidies such as fuel, where the RON95 petrol and diesel prices were raised by 20 sen each on Sept 2 to RM2.10 and RM2 per litre, respectively.

Data from the Statistics Department showed the CPI rose to 2.8% year-on-year in October from 2.6% in September and 1.9% in August.

“Right now, it would be in the region of 3%, but we don’t know what other adjustments are to take place,” Zeti told reporters at the Leadership Energy Summit Asia 2013.

However, she said the tariff hike’s impact on prices would only be temporary based on the central bank’s assessment of the trend.

“This is something that needs to be done because it is not sustainable when the market price changes, and therefore, it is important that Malaysia makes such adjustments,” said Zeti.

The rise in tariffs, announced by Energy, Green Technology and Water Minister Datuk Seri Dr Maximus Ongkili on Monday, would see those in the peninsula paying an average of 14.89% or 4.99 sen more per kilowatt-hour (kWh) to 38.53 sen, while for Sabah and Labuan, the average tariff would rise 16.9% or five sen per kWh to 34.52 sen.

For industry users, the average tariff will be raised by 16.85% to 36.15 sen per kWh, while commercial users will pay 47.92 sen, up from 41.01 sen.

Citigroup Inc economist Kit Wei Zheng said in a report that Bank Negara might not be in a hurry to raise benchmark interest rates, which stands at 3%, as there were few signs of demand-pull inflation or second-round effects after the September fuel price hike.

He pointed out that recent comments from Zeti suggested that the central bank might be prepared to tolerate what it viewed as a “temporary” rise in inflation (of up to 3.3% in the first quarter of next year) due to supply-side cost-push factors, while the growth outlook remains uncertain.

Kit said hikes in the benchmark interest rates had become increasingly contingent over the growth outlook firming up.

He expected a 25-basis point rate hike in May, with another 25-basis point hike in July in anticipation of inflation hitting 3.8% to 3.9% from June/August.

He said considerations that the central bank would have to take into account included the ability of households to service debt, as well as the direct and second-round inflationary impact of the 6% goods and services tax effective April 2015.

“Going forward, our base case is for five sen to 10 sen per litre fuel price hike by year-end and for 20 sen per litre hike before July 1, 2014. As we had argued in our assessment of Budget 2014, we suspect policymakers would probably opt for gradual but somewhat more frequent and frontloaded hikes.

“With the kick up from the tobacco excise hike, inflation may hit Bank Negara’s implicit tolerance threshold of 3% by year-end, with a decisive breach coming in the first-half of 2014,” he noted.

Meanwhile, CIMB Investment Bank Bhd economic research head Lee Heng Guie said the second-round impact of higher power rates depended on the degree of pass-through to end-users.

“If previous episodes of tariff hikes are any guide, then the impact on inflation could be rather muted. Thus, we maintain our CPI growth estimates of 2.2% for this year and 3% for 2014, which continue to factor in some administered price adjustments, especially for fuel,” he said.