No rate hike due to removal of fuel subsidy, economists

PETALING JAYA: Economists do not expect Bank Negara to pursue a rate hike in the wake of the removal of fuel subsidies, despite it possibly leading to higher inflation.
"This (removal of subsidies) comes as a surprise, (but) the central bank will act cautiously, I think they won't react to this as it is cost-push. (With) the global economy uncertain now, there is no compelling reason for the central bank to use monetary policy to handle this issue," Kenanga Research economist Wan Suhaimi told SunBiz when contacted.
"It (the rate hike) will not be that soon during the Goods and Services Tax (GST) implementation, most likely if (there is) any increase in interest rate, it would be (done at the) end of next year," he added.
AllianceDBS Research economist Manokaran Mottain concurs, stressing that interest rates are likely to be maintained as it is used to address financial imbalances and not for inflation.
He said it is a good move to have a market-based mechanism but it has to come with more cash rebates for the people to reduce their burden.
AmBank Research senior economist Patricia Oh, meanwhile, in her research report last Friday expects headline inflation to register an average growth of 3.2% in 2014 and 4.2% in 2015.
She said overall government expenditure on fuel subsidy will reduce during the forthcoming fiscal year if global crude oil prices continue to hover below expectation.
"Similarly, lower-than-expected global oil price results in a reduction in government revenue in 2015," she noted.
Assuming that Brent crude oil price remains below US$100 per barrel in 2015, Oh said total government revenue is expected to fall short of its current projection of RM235.2 billion.
Over budget deficit, she foresees an increase of 0.1% from the current estimate to 3.1% of gross domestic product (GST) in 2015 on a net basis should the Brent crude oil reduce to as low as US$67 per barrel on average. On Friday, Brent crude oil price was at US$80.55 a barrel.
The government has guided for a budget deficit of 3% of GDP for 2015 versus its estimate of 3.5% in 2014.
Based on the budget announcement in October, the provision for overall subsidies amounted to RM37.7 billion for 2015.
For 2014, the government has allocated a staggering RM40.6 billion (or 18% of total revenue) for overall subsidies, a reduction of RM2.8 billion compared with a year ago.