Malaysia Sees Price Pressures as Domestic Demand Spurs Growth

Malaysia’s economy may expand as much as 6 percent this year on domestic demand and investment, and inflation is expected to accelerate, the central bank said.

Gross domestic product will probably increase 5 percent to 6 percent in 2013, after growth of 5.6 percent last year, Bank Negara Malaysia said in its annual report released in Kuala Lumpur today. That’s higher than the Finance Ministry’s previous forecast of 4.5 percent to 5.5 percent. Inflation may average 2 percent to 3 percent in 2013 from 1.6 percent last year, it said.

Southeast Asian nations have shown resilience to the global slowdown, with Malaysia’s economy expanding at the fastest pace in more than two years last quarter. The central bank has held interest rates for 11 meetings as consumer price gains that are among the lowest in the region reduced the need for additional monetary stimulus.

“Economic activity will be anchored by the continued resilience of domestic demand, and supported by a gradual improvement in the external sector,” the central bank said. “Monetary policy in 2013 will focus on addressing potential risks to inflation and growth.”

The ringgit has lost about 2 percent this year amid concern Prime Minister Najib Razak’s ruling coalition will lose seats in parliament in elections that must be held by late June. The FTSE Bursa Malaysia KLCI Index of stocks has fallen 3.7 percent after hitting a record on Jan. 7.

Policy Outlook

Monetary policy this year will be shaped by the uneven recovery in the world economy, persistent volatility in the financial and commodities markets, large capital flows and domestic development, Bank Negara said today. The prime minister has increased government spending by extending cash handouts to low-income families and raising civil servants’ pensions while refraining from cutting fuel subsidies.

“We expect Bank Negara Malaysia to calibrate an appropriate monetary policy to balance between the inflation risk and keeping up the growth momentum,” Lee Heng Guie, chief economist at CIMB Investment Bank Bhd. in Kuala Lumpur, said before the report. “We think there is an even chance that the central bank will raise policy rate in the second half when economic conditions improve further.”

While global growth is projected to improve in 2013, the performance of advanced economies continues to be uneven amid structural weaknesses and ongoing strains in public finances, the central bank said. Lawmakers in Cyprus yesterday rejected an unprecedented plan to force depositors in the Mediterranean nation to shoulder part of a bailout with their savings, reigniting concern the European debt crisis will worsen.

Strong Inflows

The large-scale policy easing in major economies has led to strong inflows into emerging markets and this trend is expected to continue, Bank Negara said. These capital flows could result in macroeconomic and financial instability and might lead to excessive increases in exchange rates and asset prices in the recipient countries, it said.

Bank Negara may be vigilant on spillover effects from global liquidity to ensure rates are not too low to encourage risk-taking and excessive leveraging, CIMB’s Lee said.

Domestic demand, which is expected to remain the major contributor and driver of economic growth, is forecast to grow 8.1 percent in 2013, after climbing 10.6 percent last year, the central bank said. Manufacturing may expand 4.9 percent this year, more than the 4.8 percent pace in 2012, it said.

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