Malaysia's central bank on Monday maintained its interest rates at 3.50 percent, defying expectations they could be hiked after inflation surged to a 26-year high. Malaysia's inflation skyrocketed last month to 8.5 percent on the escalating cost of fuel and electricity.
In June it hit 7.7 percent following an unpopular 41 percent fuel price hike by the government to reduce its fuel subsidy bill. The central Bank Negara warned that inflation was expected to remain high for the rest of the year and early 2009 before easing in the second half of 2009.
"Domestic inflation is expected to remain high for the remaining part of 2008 and going into early 2009, primarily reflecting the first-round effects of the adjustments in energy prices, and the higher commodity and food prices," it said in a statement. It said the recent slowdown in commodity prices will likely ease operation cost pressures for businesses and that slower economic growth will reduce the likelihood of second-round effects on inflation.
"The assessment is therefore that inflation is expected to moderate substantially in the second half of 2009," Bank Negara said. "With the expected moderation in inflation in the medium term, the greater priority is to avoid a fundamental downturn in economic activity," it said. The bank said the current interest rate was consistent with its medium term outlook for inflation and growth and added that it will assess both global and domestic developments in deciding monetary policy.