Malaysia cut the lower end of its economic growth forecast for this year, predicting inflation will hurt household spending amid an uneven global recovery.
Gross domestic product may rise 4.5 percent to 5.5 percent in 2014, after climbing 4.7 percent last year, the central bank said in its annual report released in Kuala Lumpur today. That’s wider than the Finance Ministry’s previous range of 5 percent to 5.5 percent. Inflation may be between 3 percent to 4 percent this year, from a rate of 2.1 percent in 2013, it said.
Prime Minister Najib Razak has raised subsidized fuel prices and electricity tariffs in recent months, adding pressure on policy makers to contain inflation that is eroding purchasing power. The world’s major economies pledged last month to maintain generally accommodative policies as nations including South Africa, Brazil and India saw their currencies rattled as the Federal Reserve begins to dial-back stimulus.
“At this point in time, the recovery in the global economy is positive and very encouraging, but we don’t rule out risks that could slow down the process,” central bank Governor Zeti Akhtar Aziz told reporters in Kuala Lumpur today. “If it continues to improve, which is what we expect it will be, then the growth will in fact be 5 to 5.5 percent.”
Malaysia saw a reversal in portfolio flows last year after investors pared holdings in emerging markets on expectations the Fed would trim its stimulative bond-buying program as the U.S. economy recovers. It recorded an outflow of 2.8 billion ringgit ($854 million) compared with inflows of 58.4 billion ringgit in 2012, the central bank said in the report.
The ringgit has fallen about 4.8 percent in the past 12 months, while the FTSE Bursa Malaysia KLCI Index of stocks has fallen about 2.7 percent this year. The currency will probably remain “volatile” in 2014 due to capital flows, Zeti said.
Emerging economies face the challenge of managing external risks, the central bank said. A transition in monetary policy in advanced economies could heighten volatility in exchange rates, financial markets and capital flows which could destabilize growth in these countries, it said.
“While the economy will continue to benefit from the gradual global recovery, the private sector-led domestic demand remains the key driver of growth,” the central bank said. “The focus of monetary policy remains on preserving price stability in an environment of sustainable growth.”
Consumer prices rose 3.4 percent in January from a year earlier, the fastest pace since October 2011. Interest-rate swaps are starting to price in two increases in benchmark rates in the next 12 months, with one-year ringgit contracts rising 21 basis points to 3.44 percent since Oct. 25 as of 5:40 p.m. in Kuala Lumpur, according to data compiled by Bloomberg.
Najib cut state subsidies on some essential items to reduce public expenditure, after Fitch Ratings lowered Malaysia’s credit rating outlook in July. The government’s fiscal deficit is expected to narrow to 3.5 percent of GDP this year from 3.9 percent last year, the central bank said.
“Given the nature of factors behind the increase in inflation, monetary policy is not the best policy tool to manage the situation,” the central bank said. “Nevertheless, higher cost-push inflation could lead to inflation expectations becoming unanchored and could, in turn, lead to wage growth that is not consistent with productivity growth.”
Monetary surveillance will focus on identifying signs that inflation is becoming more pervasive and persistent, where a monetary policy response would become more appropriate, the central bank said.
Malaysia plans to start a new base lending reference rate for banks to price their consumer loans from January 2015, Bank Negara said in a statement. The shift to the new rate will be neutral on borrowing costs and doesn’t represent change in monetary policy stance, it said.