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Monetary Policy Statement

Ref No : 07/08/09 25 Jul 2008 Embargo : Not for publication or broadcast before 2000 hours on Friday 25 July 2008

While the Malaysian economy has performed well in the first-half of the year, in the next twelve months, it is expected to experience a more challenging environment in which both the risks to higher inflation and slower growth have increased considerably. The assessment is for a slower global growth with a more protracted and significant slowdown in a number of the developed economies and some moderation in growth in the emerging economies. At the same time, commodity and energy prices are expected to remain at elevated levels, thus fuelling inflation in the global economy.

The performance of the Malaysian economy in the first-half of 2008 has been driven by robust domestic demand and reinforced by favourable export performance. The recent major restructuring of domestic energy prices to bring prices closer to the substantially higher international prices is intended to reduce the fundamental distortions that it might create, and to ensure fiscal sustainability. These adjustments are expected to have a deflationary effect on the economy in the second half of this year and into the early part of 2009.

The adjustments to the higher international energy and commodity prices have translated into higher domestic consumer prices. In June, consumer price inflation increased by 7.7%, of which about 41% of the increase in inflation was due to the increase in transportation costs while another 41% of the increase has been due to higher prices for food and non-alcoholic beverages.

The Bank is projecting inflation to remain elevated in the second-half of this year and into early next year before moderating towards the middle of 2009. The average inflation for 2008 is projected to be in the range of 5.5-6.0%. The inflation rate is expected to moderate in the second half of 2009 in the context of a more moderate growth environment. Currently, much of the significant rise in inflation is due to the increase in fuel prices. At this stage, the concern is for broader price increases and second-round effects, which would result in inflation being persistent. In such circumstances, the appropriate monetary policy response will be taken in order to maintain medium term price stability and ensure that the high inflation does not undermine the longer term growth prospects of the Malaysian economy.

In the next twelve months, while both the risks to higher inflation and the risks to slower growth have increased, the immediate concern is to avoid a fundamental economic slowdown that would involve higher unemployment. Slowing growth itself will contribute to containing the potential for second round effects on inflation, thereby containing further increases in prices in the second-half of 2009. Given the underlying fundamental strength of the economy, and the resilient banking sector, the Bank’s assessment is that after this transitional period, the Malaysian economy has the potential to reestablish its medium term growth path.

Based on this assessment, the Monetary Policy Committee has decided to keep the Overnight Policy Rate unchanged at 3.50%.

Bank Negara Malaysia
25 Jul 2008

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