Highlight Fresh inflation concerns

by **Cals** Tue 24 Jun 2014, 23:52

Highlight Fresh inflation concerns

Business & Markets 2014

Written by Afiq Isa of theedgemalaysia.com

Tuesday, 24 June 2014 09:10

KUALA LUMPUR: Malaysia would be the least affected of Asean countries in the immediate term by the spike in crude oil prices, due to its export-oriented economy, said UBS Investment Bank senior economist for Asean Edward Teather.

However, a prolonged spell of higher-than-forecast oil prices, due to heightened tensions in Iraq, could lead to fresh inflationary concerns in spite of the country’s status as a net oil exporter in the region, noted Teather.

“A ‘supply shock’ situation, or a decline in supply arising from Iraq would be unambiguously negative for Asean and affect its members’ current economic growth trajectory, giving way to higher inflation than expected,” the economist told The Edge Financial Daily during a conference call yesterday.

Due to concerns over disruptions to Iraq’s oil exports, Brent crude oil prices have leapt to a nine-month high to move past US$114 (RM365.94) a barrel. Prices were around US$107 at the beginning of the year.

The tension in Iraq seems unlikely to end soon. Sunni militants, who aim to carve out an Islamic state straddling Syria and Iraq, tightened their grip on Western Iraq on Sunday and were pressing towards the capital, Baghdad.

As people flee the escalating violence between the Sunni militants and the Shi’ite-led government security forces, some major oil refineries have been shut down, disrupting Iraqi oil exports.

Iraq contributes 3.33 million barrels per day (bpd) or 11.2% of the Organisation of Petroleum Exporting Countries’ (Opec) daily crude production of 29.77 million bpd.

Growing geopolitical concerns such as this could force policymakers to address inflation by enforcing stricter monetary policy to tackle the growing economic imbalances, said Teather.

“The price of Brent crude hit US$115 last week, which is not far from the 12-month average of US$112. If prices had risen purely due to the strength of demand, the effect on the regional economy would be less adverse,” said Teather, noting that in this case prices have risen due to a supply shock.

The recent spike in oil prices is unfortunate for Malaysia, which has just had a breather having successfully tackled the inflation momentum that saw a lift from last September’s subsidised fuel price hike.

The inflation figure showed prices rose 3.2% year-on-year (y-o-y) in May, slowing from 3.4% y-o-y in April, undershooting economists’ expectations.

“Inflation data showed price momentum in Malaysia decelerated further in May, suggesting demand pressure remains contained,” wrote BNP Paribas in a report yesterday.

A sharp slowdown in property price gains following the cooling measures, as well as the easing of food prices due to a multitude of price controls of key consumer staples have helped tamed inflation, it said.

Going forward, however, further subsidy cuts and the introduction of the goods and services tax (GST) in April next year are expected to keep the inflation rate at over 3% over the next two years, UBS said.

“Global food and commodity prices have fallen, meaning that price pressures are modest in the near term. However, we explicitly include fuel subsidy reductions in our forecasts, leading to an inflation projection of 3.6% by end-2014,” it said in a recent report.

BNP Paribas said that assuming no change in fuel prices before year-end, headline CPI should average 3.2% in 2014.

According to UBS, inflationary pressure provides critical hints about the direction of monetary policy as high inflation typically provokes tightening measures by the central bank.

UBS is forecasting a 50-basis point (bps) rise in Bank Negara Malaysia’s (BNM) overnight policy rate to 3.5% by end-2015, from its current 3%.

“BNM does not have an inflation target, but price stability features strongly in the policy mandate. We forecast a 25bps increase in BNM’s upcoming July policy meeting, followed by a further 25bps increase in the September meeting,” it said.

According to BNP Paribas, the grounds for BNM to raise the policy rate to curb inflationary pressure remain dubious, but hawkish comments from central bank officials will remain the market’s dominant focus.

“We agree that borrowing costs for households are too low, for corporates they are too high. This suggests downward pressure on wages that will in turn hurt sizeable household debt service needs.

“Thus, rather than hike rates on July 10, BNM should implement stronger macro-prudential measures such as changes to mortgage loan-to-value ratios that impede households’ ability to binge on credit further,” it said.

This article first appeared in The Edge Financial Daily, on June 24, 2014.