Interest rates expected to rise in third quarter

Different views on inflation pressure

Inflation will most probably rise in June, driven by increasing non-food prices and the electricity tariff hike. But economists are mixed on the longer-term trend of inflation as global energy prices have started to recede.

May's inflation, up from 3.2% in April, also marks the highest rise since March 2009.

“Inflation is increasingly becoming a nuisance ... We expect inflation to further gain momentum in June, following the electricity tariff hike for the first time in three years. This will see some levels of transfer pricing to end-users by business,” said MIDF head of economics Anthony Dass.

He expects June inflation to hover around 3.5% as prices of housing, utilities and fuels continue to add pressure. Effective June 1, the average electricity tariff has been increased by 7.12%.

Thus, Dass expects the overnight policy rate to be raised by another 25 basis points as this will ease inflation pressure and also contain further erosion of the negative real returns now at 0.3%.

“We believe our outlook of a stronger ringgit (of RM3=US$1) and higher base comparison in the second half of 2011 is inadequate to contain inflation pressure,” Dass, who reiterated his 2011 inflation forecast of 3.3% from 1.7% in 2010, said.

Meanwhile, CIMB head of economics Lee Heng Guie believes that inflation pressure will gradually ease off going into the second half, thanks to the easing global oil price. He expects inflation to increase at a slower pace of 3% to 3.2% between July and December, taking inflation to average 3.2% in 2011.

Lee also maintains his expectations that Bank Negara will raise interest rate by 25 basis points to 3.25% in the third quarter. The timing will be a close call between July and September.

“Compared with the previous rate hike in May, we think the confluences of external headwinds have tilted the balance of risk towards the downside for the growth outlook.

“As such, this necessitates a careful assessment on whether the current soft patch will be short-lived or prolonged before making the next rate move,” said Lee.

Taking a closer look at the numbers, core inflation, which excludes changes in the prices of food and energy, headed higher to 1.8% from 1.6% in April as non-core inflation spilt over to the core components. In January to May, inflation increased 3%.

Breaking it down, food inflation eased to 4.5% from 4.9% in April amid higher prices of chicken and sugar, which increased by 20 sen per kg in May.

However, transport prices accelerated to 6% in May from 5.3% in April, driven by the 20 sen price hike in petrol RON97 on May 5.

“We expect inflation to peak in June at 3.4%, reflecting the combined knock-on effects of power tariff hike, the removal of diesel super subsidy as well as costlier fish as fishermen went on strike over diesel subsidy cut,” said Lee.

He said the good news was the 10 sen cut in petrol RON97 in June to RM2.80 per litre would help to offset the price pressure. Hence, price pressures should start to subside in the second half. - By Tee Lin Say (The Star)

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