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Malaysia October inflation rises 3.7% on costlier food, fuel

Analysts say still rate hike is likely next year despite lower-then-expected inflation print

KUALA LUMPUR (Nikkei Markets) -- Malaysia's consumer prices rose at a lower-than-expected pace in October driven mostly by costlier fuel and food, official data Friday showed, although economists expect the central bank to push ahead with interest rate increase next year.

The consumer price index - Malaysia's main gauge of inflation - rose 3.7% in October from a year earlier, according to the Department of Statistics. That compares with a median 4.0% increase predicted in a Nikkei Markets poll, and the reading sharply lagged September's 4.3% year-on-year gain.

On a seasonally-adjusted basis, the index declined 0.2% from the previous month.

Economists said the latest benign pace of price rise isn't likely to hold the central bank back from increasing policy interest rate next year amid risks of accelerating inflation from robust economic growth, and to cushion potential fund outflow due to monetary policy tightening by major global central banks.

"Core inflation remains steady suggesting that strong domestic demand is percolating through prices," Shashank Mendiratta and Sanjay Mathur, economists at Australia & New Zealand Banking Group, wrote in a note. "We believe that the current growth-inflation mix makes a strong case for policy tightening."

Inflation in the Southeast Asian nation could remain 'elevated' in the near term amid rising oil prices, Bank Negara Malaysia cautioned last week, noting that inflation could come in at the upper-end of 3%-4% band before moderating to between 2.5% and 3.5% next year.

Earlier this month, BNM's monetary policy committee held the Overnight Policy Rate at 3.00% at its last of six scheduled meetings this year. BNM has has kept the benchmark rate unchanged since July 2016 when it unexpectedly cut it by 25 basis points.

The food and non-alcoholic beverages index, which carries the largest weighting at 30.2%, climbed 4.4% from a year earlier in October, while non-food items declined 0.1%. The index for transport group, that includes gasoline and diesel, surged 12.1% year-on-year.

Core inflation, which excludes most volatile items such as fresh food and energy prices, rose 2.3% in October compared with the same month last year.

"Stable core inflation may suggest there is little need for a more aggressive rate hiking cycle," said Nomura Securities. The firm forecasts a 25-basis point increase as soon as in January 2018.

Malaysia's economic growth accelerated in the third quarter to 6.2%, its fastest pace in more than three years, as robust domestic demand and exports fuelled expansion of services and manufacturing sectors.

--Jason Ng

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