KUALA LUMPUR: Malaysia is unlikely to raise interest rates to tame inflation in the near future as rising consumer prices are being triggered primarily by higher costs.

Second Finance Minister Tan Sri Nor Mohamed Yakcop said the country’s inflation was expected to rise up to 5% this year following the government’s recent decision to raise the prices of petrol and diesel. The price revision was aimed at reducing the government’s fuel subsidy burden in the wake of escalating crude oil prices.

“Certainly, in a demand-pull (inflation) situation, it will be very relevant for interest rates to work. But at the moment, it seems more like cost-push (inflation). It’s for Bank Negara Malaysia (BNM) to decide.

“The rate of inflation will be higher this year, there is no doubt, whether it is 4.5% or 5%. I don’t see a major challenge in inflation and interest rates, going forward,” Nor Mohamed told reporters yesterday after launching AmanahRaya Investment Bank’s Safeena Islamic Fund and the group’s 2007 annual report. Annual inflation was at a 22-month high of 3.8% in May and is expected to rise further.

The minister was responding to a question on whether Malaysia’s priority lies in tackling inflation or promoting the nation’s economic growth amid signs of a slowdown in the global economy. He said the nation’s gross domestic product (GDP) which expanded over 7% in the first quarter of this year “may be slightly affected” in the second half but a growth of up to 6% this year is still achievable.

A rise in interest rates would be likely to curb local consumer spending, hence, keeping inflation in check. However, slower spending will crimp domestic consumption, which would be a key pillar of Malaysia’s economic well-being should its export sales decline.

According to analysts, a viable option likely to be adopted by the central bank would be to allow the ringgit to strengthen. A firmer local currency would help fight imported inflation, and support local consumer spending to a certain extent.

However, a stronger ringgit will hurt Malaysia’s exports. “All in all, there is a 75% chance that the central bank would increase the overnight policy rate by 25 basis points from 3.5% to 3.75% in 2H of this year, ECM Libra said in a recent note.

BNM governor Tan Sri Dr Zeti Akhtar Aziz recently said the regulator might revise Malaysia’s real GDP growth forecast based on the prevailing circumstances after its monetary policy meeting next month.

She also indicated that the central bank could raise interest rates if the recent fuel price hike resulted in a “generalised” price increase.