M'sia economy performing below potential

Source : Business Times SG
Image : Net

HONG KONG - Malaysia's economy is performing below its potential and is not a source of inflationary pressure, central bank chief Zeti Akhtar Aziz said on Tuesday, adding that interest rates were at the right level.

'The economy is performing below potential and therefore we do not see demand-driven inflation,' Bank Negara Malaysia Governor Ms Zeti said during an Islamic finance conference in Hong Kong.

Several economists believe the Malaysian central bank may have to raise its overnight policy rate, pegged at 3.50 per cent since April 2006, due to a likely pick-up in inflation, currently at around 2 per cent.

'At this point of time, interest rates are at appropriate levels and still supportive of the economy. There is room for interest rates to remain at these levels.' And although inflation could rise because of other factors, Ms Zeti did not see any substantial pick-up.

'It could adjust upwards due to rising costs, mainly emanating from the rising prices of fuel but at this point in time the economy can absorb these increases without entering into accelerated pace of inflation,' she said.

Second Finance Minister Nor Mohamed Yakcop on Tuesday maintained that his earlier forecast that inflation would average 2-2.5 per cent in 2008, the same as the official forecast for 2007.

'I certainly don't see 4 per cent,' he told reporters in the Malaysian administrative capital of Putrajaya referring to Standard Chartered's inflation forecast for 2008.

And although some economists expect a slowdown in the current year, in part due to weaker consumer spending, Ms Zeti said the economy should maintain its momentum.

'Right now, our economy is still on a steady growth path and we envisage this to continue in 2008 because of our strong domestic demand and strong inter-linkages with other Asian economies that are doing well despite the difficult environment.'

She declined to comment on what should be the appropriate level for the ringgit currency, up 1.5 per cent since the start of the year, and said its appreciation was not a factor behind the recent export slow-down.

'The exchange rate is not an instrument of policy ... We believe exports are more determined by the demand position.' Malaysian exports in November rose 5.7 per cent from a year ago, slowing from October's 14.2 per cent growth, as sales to the United States and the European Union fell.

Speaking of restructuring of fuel subsidies on which Malaysia spends US$4.5 billion annually, Ms Zeti said that it was being studied by the government and it was up to them to take a decision.

'We also need to assess the outlook for energy prices - whether it is permanent or temporary,' she said.

It is estimated that if crude oil prices hover at US$100 per barrel, the government would have to spend RM35 billion (US$10.7 billion) on fuel subsidies this year. - REUTERS