Source from (The Star Online): http://biz.thestar.com.my/news/story.asp?file=/2013/5/25/business/13155169&sec=business
Published: May 26, 2013
That is in spite of some central banks lowering their interest rates this month in order to spur economic growth among which are Australia and India.
“Despite the recent monetary policy adjustments in regional economies, we expect the OPR to be retained for the rest of 2013, assuming that full year GDP grows at between 5% and 6% and inflation remains stable,” AmResearch says in a report.
Most economists believe inflation could increase gradually this year. Some have lowered their inflation forecast and the rest had decided to maintain their forecast after the announcement of the April consumer price index (CPI) on Wednesday.
Data released by the Statistics Department showed that inflation as measured by the consumer price index (CPI) matched economist forecasts in April.
The median forecast of 16 economists surveyed by Bloomberg was 1.7%, matching the CPI in April.
A 1.7% increase in CPI in April from a year ago was the highest rate recorded in 11 months, notably due to the rise in food and non-alcoholic drinks as well as increases in housing costs, according to the Statistics Department.
The prices of food and non-alcoholic beverages increased 3.8% year-on-year (yoy) in April, after remaining stable at 3.3% in February to March. But the prices were mitigated by core inflation rate of 0.8% yoy in April.
CIMB Research analyst Lee Heng Guie concludes that the April CPI growth was led by costlier food, such as meat, fruits, milk and eggs as well as higher prices of health products and services. This was, however, mitigated by slower increase in transportation cost due to stable fuel prices and slower growth in education cost and miscellaneous goods and services.
On a monthly basis, the CPI edged up 0.1% in April from 1.6% in March, unchanged from the previous month, while from the January to April period, the index was up 1.5% from a year ago.
Compared with many countries in the region, Malaysia's CPI growth is still considered moderate (refer to charts: Inflation by countries).
Alliance Research chief economist Manokaran Mottain says Malaysia's inflation rate remains benign at 1.5% as at April 2013 largely owing to price controls and subsidies, where prices had stayed in check for many years despite the surge in global food and commodity prices.
Nonetheless, most regional economies have registered low rates of inflation during the recent months and he believes that regional monetary accommodation is unlikely to have significant consequences on price pressures.
“We gather that inflation has been relatively stable in part due to the restricted demand and high level of unemployment in developed countries.
“Particularly, prices in Japan continued to fall for 11 consecutive months until April 2013. In other advanced countries, we note that the eurozone had registered an inflation rate of just 1.2% in April, while inflation in the US stayed subdued at just 1.1% yoy in the same month,” his note explains.
GST implementation
Having said that, most economists expect the rate of inflation to increase at the end of the year on the back of a myriad of possibilities, among others are implementation of the government subsidy rationalisation programme (SRP), minimum wage, implementation of goods and services tax (GST), volatility in commodity prices and the extension of retirement age to 60.
Manokaran maintains his full-year forecast target of 2.5% this year, with the expectation of SRP implementation towards year-end.
“While the government may likely retain subsidies for certain foodstuffs, it may be pressured to realign the subsidies for fuel (e.g. petroleum and diesel) and fuel-related products (e.g. cooking gas) in order to achieve the targeted fiscal deficit of 4% for this year,” he says.
The Government has a target to narrow the fiscal deficit to 4% of GDP this year and to 3% by 2015.
Bank Negara governor Tan Sri Dr Zeti Akhtar Aziz has said that the Government had some room to cut subsidies gradually, although there would be some impact in the form of rising costs coming from the price increase in food, transportation and energy.
However, she believes the economy can adjust if and when the Government starts to cut subsidies.
Zeti feels whatever pledges the Government had made prior to the general election would have to be within the budget.
“It is important to rationalise the budget deficit because the Government has also made a commitment to do so over the next few years and to manage its level of indebtedness,” she elaborated.
She also noted at a media briefing when announcing first quarter 2013 GDP results that inflation was expected to come in at between 2% and 3% this year.
Meanwhile, both Maybank IB Research and RHB Research assume the resumption of SRP and the introduction of GST will be deferred, based on the outcome of the 13th general election.
From their assumptions, both research houses revised their 2013 inflation forecast to 1.8% and 2% respectively compared to an earlier forecast of 2.5%.
Maybank expects the OPR to range from 3% to 3.25% and inflation to range between 2% and 2.5% in 2014, assuming the implementation of SRP and GST in 2014.
The research house expects consumer spending growth to remain firm, supported by sustained income growth and buoyant favourable market condition.
“The wealth effect from the buoyant local market supported by the strong domestic business environment will also help to keep consumer spending resilient,” it says.
Nonetheless, the 2% to 3% consensus is consider low by recent historical standards. In 2008 the full-year inlation rate stood at 5.4%.
Weak crude oil price
According to the International Monetary Fund, commodity prices fell by 2.7% in April compared to a 3.7% decline in March.
“Crude oil prices fell 3.7% in April to US$98.9 per barrel on weak demand, higher stocks and continued gains in supply.
“However, prices bounced off their mid-month lows and rose above US$101 per barrel in early May,” it says.
Weak crude oil price has slowed the increases in the cost of transportation, which inched lower to 0.6% compared to 1% in March.
However, the IMF notes that a possible prolonged decline of oil prices will involve “major risks” for oil-producing countries.
AmResearch notes that while the fund focused on the fiscal challenges in the Middle East and North African Region, it expects Malaysia to experience low risk of inflation on one hand and compression in government revenue on the other.
“Owing to the relatively prudent public debt level for Malaysia currently, temporary decline in the revenue from crude oil could be compensated by the forex reserves and other external assets,” it says.
“Nevertheless, a prolonged decrease in the global crude oil price would involve major economic risks including the surge in public debt and higher budget shortfall ahead,” it adds.
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