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Unchecked Inflation Can Cause Rise In Interest Rate - Bank Negara Must Fully Explain Why The RM3.80 Peg To US$ Which Undervalues Ringgit, Must Be Maintained And Not Reviewed.

Press Statement
Lim Guan Eng  

(Petaling Jaya, Wednesday): Malaysia's rate of inflation hit a five-year high in May 2005, with the Consumer Price Index(CPI) rising 3.1 percent from a year earlier mainly due to higher transportation costs following a hike in fuel price. May's CPI was the highest since it reached 3.8 percent in February 1999 - exceeded April's 2.7 %.

Inflation was 1.4 % last year and 1.2 % in 2003 and was forecasted by Bank Negara at 2.5% for 2005. The 3.1% inflation rate in May has exceeded Bank Negara’s forecast and is nearing the 4% inflation mark which would normally require a rise in interest rates. A rise in interest rates have serious economic impact for businesses as well as those borrowing loans to finance purchase of properties, shares and vehicles.

DAP expresses concern that an unchecked inflation rate can result in the rise in interest rates. Unless Bank Negara can reassure Malaysians that inflation can be checked, Bank Negara must fully explain why the RM 3.80 to US$ peg must be maintained and not reviewed. The depreciation of the US$ has caused ringgit to be undervalued with the resulting effect of causing inflation.

Such undervaluation of the ringgit has caused imported inflation where foreign goods are more expensive because of the weak ringgit. If the ringgit was allowed to find its higher real value, inflation can be controlled. This has caused disruption to the daily lives of Malaysians who have to pay more for basic necessities whether in the form of fuel prices, milk powder and essential goods.

Those traveling overseas or paying for their children’s foreign education also suffer by paying more than they should due to our weak exchange rate. On the other hand, exporters, service sectors and local tourism relying on foreigners benefit with increased business as our cheaper currency makes it attractive for them to visit or trade with Malaysia.

An undervalued ringgit has benefits and costs to different sectors but generally the vast majority suffer more in terms of higher imported inflation due to the lower value of the ringgit caused by the depreciating US$. Such inflation is exacerbated by the failure of Malaysians to enjoy the benefits of 5.7% economic growth in the first quarter.

Many businessmen question how Malaysia can enjoy 5.7% economic growth when their businesses have fallen by 30%. Coupled with inflation, these Malaysians facing declining businesss are also burdened by having to pay higher prices. Bank Negara must address these concerns and if all else fails a review of the ringgit peg can be one of the options available. I shall be seeking an explanation from Bank Negara on measures taken and how confident they are in checking inflation.



* Lim Guan Eng, DAP Secretary-General

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