KUCHING: Bank Negara Malaysia (BNM) might place focus on micro-management to put a lid on the upward inflation pressure which, amongst others, will be a 100 basis points (bps) hike in statutory reserve requirement (SRR) in the next monetary policy committee (MPC) meeting.
CONTINUES TO INCREASE: Dass points out that big ticket items like food, transport and housing/utilities/fuel which accounted for 67.8 per cent of the weights in CPI basket continues to increase.
“If this happens, BNM would have soaked up about RM3.7 billion liquidity from the system. Also, we expect BNM to continue favouring a strong RM/US dollar that will help contain imported inflation and cost push inflationary pressure,” said MIDF Research chief economist Anthony Dass.
Rising inflation pressure was expected to stay from the knock on effect driven by the accelerating global commodity prices that included crude oil prices. In addition, possibilities for real returns and real money to erode further could materialise if the authorities left their policy measures unchanged.
However, the research firm reiterate its view that the overnight policy rate (OPR) would be raised by a cumulative 50bps to 75bps in the second half of this year from 2.75 per cent.
For the record, inflation rose for the third consecutive month. Inflation in January 2011 increased by 2.4 per cent year-on-year (y-o-y) from 2.2 per cent in December 2010. The January inflation turned out to be the highest since April 2009.
On a month-month (m-o-m) basis, inflation rose by 0.6 per cent from 0.4 per cent in December last year, recording the highest gain since July 2008.
Big ticket items like food, transport and housing/utilities/fuel which accounted for 67.8 per cent of the weights in consumer price index (CPI) basket continued to increase, Dass pointed out.
“We attribute the rising food prices to the increasing global commodity prices which have knocked hard into food prices. We expect the upward pressure on food prices will continue in the months ahead, underpinned by further rise in global commodity prices due to the mismatch between demand and supply,” he added.
Further adding pressure to inflation was the rise in prices of transport. To recap, transport cost in January 2011 jumped by 4.3 per cent from 3.6 per cent in December 2010, the highest gain since November 2008.
Adding on, the prices of housing/utilities/fuel increased by 1.4 per cent y-o-y from 1.5 per cent in December 2010, while m-o-m turned flat following a 0.1 per cent gain in December last year. Prices of non-food items gained at the same rate as in December 2010, up by 1.9 per cent y-o-y in January 2011.
Looking ahead into 2011, the research firm expected inflationary pressure to stay which would be a major cause of concern.
Pressure would continue to be fuelled via further relaxation in fuel and sugar subsidies that would alleviate cost push inflation, as well as the rising global commodity prices including crude oil prices which continue to leave knock-on effects on food prices.
Among others would be the favourable economic growth outlook which it projected to expand by 5.3 per cent in 2011 from 7.2 per cent last year as well as the positive wealth effect and ample liquidity that would add pressure through demand-pull inflation.
However, the upside to inflation would be muted from the firmer RM/US dollar, some levels of output gap and the potential stabilisation of global commodity prices that might happen in the second half of this 2011, Dass opined.
MIDF Research projected inflation to hover between 2.5 per cent and 2.8 per cent in 2011.
According to the research report, there were possible erosion for real returns and real money depends.
“We are not rulling out the possibilities of further erosion of real returns and real money, as much will depend on the outcome of the policymakers, whether they are leaning towards growth or inflation,” said Dass.
He further revealed that real return had eroded to 0.35 per cent, with expectations of further erosion if BNM kept OPR unchanged at 2.75 per cent and allowed inflation to continue creeping up.
“Underpinned by the increasing dilemma, weighing between growth and inflation, should BNM leave OPR and/or SRR unchanged in the next MPC meeting scheduled on March 11, it endorses our view that the authorities are leaning towards growth than to inflation, suggesting further erosion of real returns become inevitable,” concluded.