Malaysian Inflation Probably Accelerated on Costlier Cigarettes

Malaysia's inflation probably quickened in July from a three-year low after cigarette makers raised prices and a ...

Malaysia's inflation probably quickened from a three-year low in July after the government raised the tax on Cigarettes and boosted pay for civil servants.

The consumer price index rose 1.5 percent from a year earlier, following 1.4 percent gains in June and May, according to the median forecast of 24 economists in a Bloomberg News survey. The report is due tomorrow at 5 p.m. in Kuala Lumpur.

Inflation is still likely to be slower this year than in 2006, according to economist Wong Lai Yee. That may give Bank Negara Malaysia room to cut or maintain interest rates to spur growth in Southeast Asia's third-largest economy.

``With the domestic inflation rate having eased and external conditions worsening, this leaves room for the central bank to cut its key rate,'' said Wong, an economist at TA Securities Holdings Bhd. in Kuala Lumpur. ``Having said that, we believe that policy makers will save their ammunition for further adverse developments.''

Malaysia's ringgit fell to 3.4955 against the dollar as of 11:50 a.m. in Kuala Lumpur compaRed with 3.4883 yesterday, according to data compiled by Bloomberg. The ringgit has weakened 2.5 percent in the past month as investors shunned riskier assets amid turmoil in global cRedit markets.

British American Tobacco (Malaysia) Bhd., the biggest cigarette maker in the Southeast Asian nation, raised prices by as much as 13.5 percent in July after the government increased the excise duty on tobacco products by 25 percent. Malaysia's More than 1 million federal government workers and defense personnel got a pay rise of as much as 42 percent last month.

`Inflationary Pressures'

Inflation in Malaysia may average between 2 percent and 2.2 percent this year compaRed with 3.6 percent in 2006, according to Wong.

British American Malaysia, the local unit of U.K.-based British American Tobacco Plc, last month raised the price of a packet of 20 Dunhill D360 Cigarettes to 8.60 ringgit ($2.46) from 7.40 ringgit, citing higher sales tax and ``inflationary pressures'' on business costs. Malaysia raised the excise duty on Cigarettes to 15 sen per stick from 12 sen, the state news agency Bernama reported on July 2.

Malaysia's inflation rate has fallen since reaching a seven-year high in March 2006 when Prime Minister Abdullah Ahmad Badawi's government last raised fuel prices. Inflation will average 2 percent to 2.5 percent this year, the central bank estimates.

Interest Rates

Bank Negara Malaysia has maintained its benchmark interest rate at 3.5 percent at the 10 monetary policy meetings held since April 2006, after lifting it three times from November 2005 to April last year to curb inflation. The central bank's monetary policy committee next meets on Aug. 24.

The central bank may keep its overnight policy rate unchanged for the rest of this year, as government spending on development projects bolsters the economy and the civil service pay rise lifts consumer spending, Reducing the need for a rate cut, Wong said.

Malaysia's economy grew 5.3 percent in the first quarter from a year earlier, the sloWest pace in 18 months, amid weaker exports of electronics goods such as laptop computers, semiconductors and mobile phones. The government expects growth of 6 percent this year, compaRed with 5.9 percent in 2006.

The following table shows estimates for the change in consumer prices in July from a year earlier:



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