After subsidy cuts, inflation rate spikes and likely to accelerate

BY ZURAIRI AROCTOBER 29, 2013

A woman cooks in her kitchen in Kuala Lumpur October 25, 2013.
Inflation rate is expected to pick up from 2 per cent this year to between 3
and 3.5 per cent next year. — Reuters pic

KUALA LUMPUR, Oct 29 — Malaysia has faced its steepest inflation rate hike in 20 months, mainly caused by the fuel subsidy cut in September which increased pump price by 20 sen per litre, Maybank Investment Bank (IB) has said.

The research house also predicted that inflation rate will likely accelerate next year compared to 2013, as a result of the recent sugar subsidy cut announced in Budget 2014 last week.

In its daily report released here yesterday, Maybank IB said that inflation in September 2013 was up by 2.6 per cent year-on-year, its highest so far this year.

It also said that “transport” was the main factor in the hike as it went up 4.6 per cent year-on-year, after the pump price of RON95 petrol and diesel went up in September 3, and RON97 petrol two days later.

As a result, it expected that inflation rate will pick up from 2 per cent this year to between 3 and 3.5 per cent next year.

“The forecasts reflect the combined impact of the 14 per cent hike in cigarette prices on 1 Oct 2013, the removal of sugar subsidy effective 26 October 2013 and our expectation of further adjustments in fuel prices next year in view of the lower Budget 2014 operating expenditure allocation for subsidies,” said the report.

Malaysia will finally implement the long-delayed Goods and Services Tax (GST) at 6 per cent beginning April 2015, Prime Minister Datuk Seri Najib Razak announced on Friday as Putrajaya seeks to tackle its chronic deficit.

On Friday, Putrajaya said it would stop subsidising sugar by the current 34 sen/kg starting, in a move that may cause cascading price hikes.

Earlier this month, British American Tobacco (BAT) Malaysia confirmed a price increase of at least RM1.50 for its range of cigarettes that it blamed on a “drastic” and “excessive” 14 per cent increase in tobacco excise recently.

Malaysia has embarked on a series of fiscal consolidation moves following global ratings agency Fitch which revised Malaysia’s sovereign debt outlook from “Stable” to “Negative” in July.

Putrajaya has stated that it aims to reduce the budget deficit to 4 per cent this year and gradually to 3 per cent by 2015.

A prediction by the Asian Development Bank (ADB) said Malaysia’s inflation rate will increase to 2.2 per cent in 2014 from the cuts, while Putrajaya predicted the figure as closer to 2.3 per cent.

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