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Malaysia's Bank Negara sees March inflation exceeding 8-year high

Tuesday, March 28, 2017 - 17:05

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Higher fuel costs probably pushed up Malaysia's inflation rate this month to above the 4.5 per cent rate posted in February, though there's no evidence that price pressures are spreading more broadly in the economy, an official from the central bank said.

[KUALA LUMPUR] Higher fuel costs probably pushed up Malaysia's inflation rate this month to above the 4.5 per cent rate posted in February, though there's no evidence that price pressures are spreading more broadly in the economy, an official from the central bank said.

Last month's inflation rate - which was the highest in more than eight years and exceeded the median estimate of 3.9 per cent in a Bloomberg survey - wasn't a surprise to the central bank, Fraziali Ismail, director of the economics department at Bank Negara Malaysia, said in an interview in Kuala Lumpur. If oil prices stay where they are, it's a "question of arithmetic" that inflation would accelerate, he said.

"Typically in the past, there could be second-round effects if the economy is above potential" and there are demand pressures, he said on March 24.

"Yes, the economy is on the up, but we don't see those pressures emanating at the moment."

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Bank Negara Malaysia said in its annual report released last week that inflation will probably average three per cent to four per cent this year, up from 2.1 per cent in 2016.

The spike in inflation is complicating Bank Negara's job as it seeks to keep interest rates low enough to support the economy. The bank has left its benchmark rate unchanged at three per cent since a surprise cut in July, and economists surveyed by Bloomberg are divided in their views on whether it will raise, reduce or keep rates unchanged this year.

While economic growth has picked up speed, it's not exceeding the pace of potential output yet, which is estimated to be about 4.7 per cent this year, Mr Fraziali said. The economy grew 4.2 per cent last year and is forecast by the central bank to expand 4.3 per cent to 4.8 per cent in 2017.

"We are operating close to potential, but we don't see signs that we are exceeding," he said.

"Unless the economy is jolted to an accelerated growth, then there's a higher potential for second-round effects."

The central bank will monitor signs of slack in the economy, such as unemployment and capacity utilisation, to give it "better clues on how the economy is faring against potential," he said.

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