RAY

KUALA LUMPUR, July 24 — The higher-than-expected increase in the June inflation rate puts more pressure now on Bank Negara Malaysia to raise the overnight policy rate.

The 7.7 per cent rise in the June consumer price index was higher than the market estimate, according to two economists who had previously expected it to be below 7 per cent.

The chief economist at RAM Holdings Bhd, Dr Yeah Kim Leng, said the jump in the CPI was above expectations and also the highest since 1986.

Transportation and food are the main contributors to the increase, Yeah said yesterday.

Yeah said the 7.7 percent increase was a good reason for the central bank to increase the OPR.

According to Yeah, he expects Bank Negara to decide to increase the OPR by 25 basis points at its monetary policy meeting tomorrow.

He also said Bank Negara is likely to raise the OPR by small basis points and gradually.

Bank Islam senior economist Azrul Azwar Ahmad Tajudin said the possibility that Bank Negara would raise the OPR was 50:50.

“The decision depends on Bank Negara’s expectations. If it views the current rise in inflation as being temporary, raising the OPR may not be appropriate,” he explained.

He stated the current rise in inflation was mostly driven by costs rather than demand.

He suggested the government consider introducing other administrative, non-interest rate measures to combat inflation which, he agreed, was higher than expected for June.

“I projected the CPI to touch 7.1 per cent. But the 7.7 per cent rise was above expectations,” Azrul Azwar said.

He also expects the CPI to stay above 7 per cent for the next 12 months due to higher petrol and diesel prices.

“The removal of the fuel subsidy is a major source of inflation in Malaysia,” he added.

However, he pointed out that the high inflation rate can be reduced to 3 per cent or less.

“I believe by the second half of 2009, the CPI growth can come down, assuming there are no fuel price increases, an upward review on utility tariffs and food prices stabilise.

“If these three indicators materialise, then the people won’t feel the pinch of inflation so much,” he said.

The CPI for June rose 7.7 per cent to 113.4 from 105.3 in the same month last year, due to the recent sharp increase in petrol and diesel prices.

The June CPI also increased by 3.9 per cent when compared to May this year as a result of the notable rise in the index for transport at 18.8 per cent. — Bernama