KUALA LUMPUR: Bank Negara Malaysia (BNM) may raise interest rate by at least 50 basis points (bps) (0.5%) next year to combat inflationary pressure on the economy from continued subsidy cuts on fuel and power, the research arm of global financial services firm Citigroup said.
“Our base case anticipates that BNM may tolerate inflation at 3.1%-3.3% in first-quarter of 2014 (1Q14) before hiking 25 bps in May and again in July in anticipation of inflation breaching 3.5% from July-August,” Citi Research said in a note on Malaysia’s macro economic view.
However, the agency noted that there is also a possible risk that the hikes are delayed to the second-half (2H) of next year or beyond.
Citigroup was the second financial services firm in the past few weeks that anticipated the power rate hike in Malaysia.
The central bank, however, has put to rest the speculations and said that it is still in a “wait-and-see-mode” and a decision on tinkering with rates will be made based on the source of inflation and growth expectations for the Malaysian economy.
“Apart from uncertainties in external demand, other considerations that may shape monetary policy action in 2014 include concern over household debt servicing ratios of households and the inflationary impact of 6% Goods and Services Tax in April 2015,” it said.
The indirect tax system that will overhaul the current system of Sales and Services Tax for one common 6% tax, could add up to 1.4% points to headline inflation in 2015, the research firm said.
The monetary tightening in Malaysia next year, if comes about, will be one after a gap of three years for the country which has kept its rates steady at 3% since May 2011 in a bid to support domestic demand.
In 2012, the price rise of commodities was recorded at 1.7% and in 2013 despite the two fuel price hikes, the inflation level is expected to be at 2.2%.
“Gradual but front loaded subsidy rationalisation should continue, with a further 10 sen/litre hike possible by end 2013, pushing headline inflation above 3% by 1H14,” Citi Research said.
It said that 2014 could be a year of growth re-balancing with fiscal consolidation likely to take centre stage to control the growing fiscal deficit.
The current account surplus is expected to widen to 4.4% of gross domestic product from 3.7% this year as the fall in public and private savings rates is gradually arrested by fiscal and macro prudential tightening.
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