Interest rate hike to follow fuel hike?

At least one analysts think so.

Kenanga Investment Research economist Wan Suhaimi Saidi was quoted by The Star Business Section saying there was a 50:50 chance that interest rates would be increased.

“CPI exceeded 6% because of adjustments to the petrol and diesel prices by 40.6% and 63.3% respectively” – Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz

This seems a likely scenario after Bank Negara Governor Tan Sri Dr Zeti Akhtar Aziz said the CPI in June was expected to exceed 6% because of adjustments to the petrol and diesel prices by 40.6% and 63.3% respectively.

If inflation doesn’t come down in the next few months, Bank Negara may nave no choice but to pull the brakes of interest rates and slow things down a bit. However since this is not wealth or income-pushed inflation but a cost-pulled inflation such an increase in interest rate may prove counter productive.

Dr Zeti will have to do some big number crunching before she decides. If the Government doesn’t want inflation to hurt the economy and the people they will have to incur some deficit spendign and embark on large scale civil engineering projects to pump money into the economy. The double tracking from Ipoh to Padang Besar and Seremban to Johor are just a few that are on the cards.

June inflation was at record levels, hitting 7.7 per cent and it will remain high for the next few months, fueled by an electricity tariff hike which will hit our pockets in July. Analysts say it’s rate of increase would slow down simply because we are would be measuring from a larger base as the months progresses.

If you want to upgrade your car to a more fuel efficient model, do it now before interest rates go up.