Bank Negara throwing caution into the wind on inflation

From The Business Times:

Malaysia has room to press ahead with economic stimulus measures this year and next given sound levels of government debt and the need to counter the global crisis, the head of the country's central bank said on Monday.

Asked about the bank's recommendations to rein in the country's budget deficit, officially expected to hit 7.6 per cent of gross domestic product (GDP) this year, Bank Negara Malaysia Governor Tan Sri Dr Zeti Akhtar Aziz said: "This is a period where the fiscal stimulus is still important."

Speaking on the sidelines of an event, she added: "Any premature exit from the fiscal stimulus would affect the sustainability of the recovery that we are seeing now and Malaysia has the potential to continue with the stimulus for 2009 and 2010."

While fiscal discipline was important, Zeti said government debt was still within prudential levels, allowing stimulus steps in 2009 and continuing next year, if necessary.

"But it is always important to exercise fiscal discipline and to maximise the potential for the high impact, high multiplier expenditure," she added.

Zeti declined to comment on the central bank's projections for the size of the budget deficit in 2010 and expectations for bond issuance on a net and gross basis next year.

The budget shortfall of 7.6 per cent of GDP forecast by the government for this year would be the biggest since 1987.

Zeti said steps to exit supportive stimulus measures would tend to be conducted on an individual country basis in the Asian region although information would be shared among a number of countries.

Turning to consumer price trends, Zeti said that recent declines were no sign of damage to consumer demand.

"Consumer demand is gaining momentum and in the second quarter, we saw a recovery of small positive growth," she said, adding she expected this to persist into the second half 2009.

Price declines did not give rise to concern given that they were largely due to a lingering base effect from last year when petroleum and commodity prices spiked, she said.

"We believe, going into the subsequent months of this year, that inflation will turn positive but it will remain low."

Analysts polled by Reuters expect Malaysia's consumer price index to have fallen for a third straight month in August. - Reuters

It seems like Bank Negara will be supporting a much more lenient monetary stance and rates probably will not rise any time soon. I don't think they will be raising rates so easily despite the threat of inflation and blatantly acknowledging consumption is still going strong.

Inflation will probably creep up faster in Asia than anyone expects. Remember that change in commodity prices have an amplified effect on inflation in south east Asia than in Europe and US.