Malaysia no recession, ringgit rising and Inflation easing

KUALA LUMPUR) Malaysia's economy is not expected to fall into recession and its currency could gradually firm over the medium term, the central bank chief was quoted as saying last Saturday.

Economic growth next year will hit the 3.5 per cent official target, with policies in place to contain the fallout from the global slowdown, Bank Negara governor Zeti Akhtar Aziz was quoted as saying by The Star newspaper.

'We are not in a recession and we don't expect to be in one,' Ms Zeti said. 'In our case, we took action very early so there is the potential for containing the severity of the crisis.' She said the central bank was ready to adjust monetary policy to support growth.

'We have said that we would take swift action to support the economy,' Ms Zeti said, when asked where interest rates were headed. 'If it is necessary, certainly we have the flexibility to do so.

The fast-growing South-east Asian economy has been bolstered by rocketing crude oil and palm oil prices in recent years but some analysts say a sharp slowdown is around the bend due the economy's heavy reliance on trade. Malaysian bank RHB has forecast domestic economic growth at just 1.5 per cent in 2009.

Malaysia's official interest rate has been at 3.5 per cent for more than two years, putting it among Asia's lowest, and Ms Zeti reiterated an earlier assessment that inflation had peaked and said it would ease to below 3 per cent in the second half of 2009.

She also repeated a pledge to ensure an orderly foreign exchange market.'In the near term, we are going to see volatility but the medium-term underlying trend should be a gradual appreciation,' she said, referring to the ringgit currency's movements. 'What is key to us is that the market remains orderly. The central bank will be there to ensure orderly conditions.'

Inflation likely to ease further, this is in tandem with declining oil prices.

Malaysia's inflation rate, as measured by the consumer price index (CPI), is expected to ease further in October and well into next year in tandem with declining oil prices, economists said.

The CPI is a measure of the average prices of consumer goods and services purchased by households.

Malaysian Institute of Economic Research executive director, Prof Datuk Dr Mohamed Ariff, said inflation is expected to ease considerably next year as slower growth translated into weaker demand.

“Inflation will be a non-issue in about six months time,” he said. “The chances are that we are likely to face a deflationary situation come next year.”

The official October inflation data will be released this Wednesday.



Inflation had also eased slightly in September to 8.2% as transportation prices rose at a slower pace.

The prices in three main sectors of the CPI basket, namely transport, housing and utilities, as well as prices of food and non-alcoholic beverages, which collectively account for 89% of the CPI, are expected to decline.

“The recent decline in oil prices would be the main factor for the decline in the main components,” an economist told Starbiz, adding that the CPI was likely to ease from here onwards, starting from September.

She pegged October inflation at 7.8% and 5.5% for the year to October.

She also forecast this year’s inflation rate to be at 5.8%, and 3.4% for 2009.

“We believe that there is no indication the fuel prices would go up (again), leading to a second round of effects or increases in prices of food and raw materials moving forward,” the economist said.

Malaysian Rating Corp Bhd chief economist, Nor Zahidi Alias, concurred that the CPI should be softening as the impact of lower petrol prices started to trickle into the economy.

However, he did not foresee a drastic drop in the CPI until the second half of next year because of the base effect and moderation in aggregate demand.

After the government raised fuel prices in June, inflation surged to 26-year highs at 8.5% in July and August before easing to 8.2% in September.

But since August, the Government has cut fuel prices four times to reflect the declining crude oil prices from the record high of US$147 per barrel in July.