POSSIBLE EFFECT: RHB Research foresee risk of a rise in inflation driven by higher international food prices to spillover into a demand-pull inflation once domestic demand regains its growth momentum.
KUCHING: Bank Negara Malaysia (BNM) is expected to raise the statutory reserve ratio (SRR) of banks again by another one percentage point to three per cent in
its next policy meeting on May 5.
Although an increase in the SRR would lead to higher intermediation costs for the banks, it would send out a positive signal that the central bank was being proactive in managing the monetary conditions in the country, noted RHB Research Institute Sdn Bhd (RHB Research).
On the other hand, it also reported that the headline inflation rate climbed to three per cent year-on-year (y-o-y) in March, reaching the highest in 23 months. “This marked the fourth month of increase and was mainly due to pick-up in the core inflation rate, while food and non-alcoholic beverages prices remained stable during the month,” said the research house.
The core inflation rate rose by 2.3 per cent y-o-y in March, faster than plus 2.1 per cent in February. It pointed out that these were made worse by a slower decline in the costs of communication and a faster increase in the costs of education during the same period.
“These were, however, mitigated by a decline in the prices of clothing and footwear in March, after remaining unchanged in February. The costs of healthcare and charges at restaurants and hotels, on the other hand, remained stable in March.”
Whilst the increase in food prices might have peaked given improving weather conditions around the globe, the higher international food and commodity prices might still translate into an increase in domestic food and non-alcoholic beverage prices going forward.
Also, a rise in crude oil prices would likely translate into higher retail fuel prices, if the government proceeds with its plan of reducing the subsidy once every six months, said RHB Research.
Already, the RON97 retail petrol price, which was pegged to the market price and more expensive than RON95, had risen to a high of RM2.70 per litre on April 2, compared with RM1.90 per litre for RON95. It remained to be seen as to what extent the government would increase the retail price of petrol RON95 when it was due for review in June.
However, the research firm believed the government was unlikely to repeat the mistake made in 2008 when fuel prices were raised by 41 to 63 per cent that created a ‘shock’ to consumers. “As a result, if there is any hike, we believe it would likely be gradual and the government will likely bear with additional subsidies in order to cushion the impact.
“A 10 sen hike or 5.3 per cent increase in fuel prices will add about 0.4 percentage point to the consumer price index in June 2011. We believe traders are likely to take advantage of the situation to raise other retail prices. As a whole, we expect inflation to grow at a faster pace of three per cent in 2011 but likely to be manageable, compared with plus 1.7 per cent in 2010,” it pointed out.
In addition, the research firm foresaw risk of a rise in inflation driven by higher international food prices to spillover into a demand-pull inflation once domestic demand regains its growth momentum.
As a result, there was a need for the central bank to resume its policy normalisation in the second half of the year. BNM had indeed highlighted in its recent annual report that while the risk of more modest growth remained, the risk of higher inflation also needed to be managed, given that the upside risks to inflation had become increasingly visible during the year.
It also mentioned that the degree of accommodation in its policy might need to be adjusted to ensure that economic growth in the medium term would not be damaged by higher inflation even though the policy would remain accommodative.
This suggested that it was a question of timing when the overnight policy rate would be raised, said RHB Research. “We believe BNM will likely resume raising interest rates from July 2011 when economic growth regains its momentum,
As a whole, we expect the OPR to be raised by 50 basis points in 2H11 to bring it to a more neutral level of 3.25 per cent.”