April 25, 2008 / 7:08 AM / 11 years ago

Malaysia says rates not answer to high food prices

KUALA LUMPUR (Reuters) - Malaysia’s central bank does not believe interest rates are the answer to curbing high food prices, central bank chief Zeti Akhtar Aziz said on Friday.

Annual inflation hit a 13-month high of 2.8 percent in March, driven mainly by costlier food, prompting some economists to speculate that the central bank may have to raise interest rates, among Asia’s lowest, by the end of the year.

But Zeti told reporters food-price inflation was being driven by structural problems with supply and that it would be better dealt with by boosting supply rather than adjusting rates.

“This increase in prices is due to structural developments that relate mainly to supply conditions that are not able to meet demand,” she said after releasing a report on Malaysia’s offshore financial centre of Labuan.

“Interest rates generally respond to changing demand conditions. In this situation, therefore, to address the issue of rising prices, we need to address it by addressing the structural issues...Therefore interest rates are not the answer in this kind of environment and under these conditions.”

Asian nations have been struggling to find best policy responses to the double-punch of record high oil prices and soaring costs of staples such as rice, which hit particularly hard the region’s poor.

Malaysian inflation has crept up since late last year but remains among the lowest in Southeast Asia, thanks largely to price controls on essential goods such as flour and cooking oil.

These controls, combined with the enormous cost of energy subsidies, are putting a severe strain on government finances, which are already in chronic deficit.

The government, as a first step, has begun a campaign to boost agricultural production and announced plans to develop stockpiles of essential foodstuffs like rice and cooking oil.

Zeti said the central bank would not use a stronger ringgit currency to help check inflation.

“We do not use the exchange rate as a policy tool. The exchange rate has to reflect the underlying conditions that don’t change suddenly,” she said.

“We want to have orderly market conditions. And so far, the ringgit has performed in highly orderly market conditions. This is important for those that are involved in international trade and those that are involved in foreign direct investment and portfolio investments.”

The ringgit MYR= has appreciated about 5 percent against the U.S. dollar so far this year, compared with about 6 percent for the Singapore dollar SGD= and 2 percent for the Indonesian rupiah IDR=.

Reporting by Liau Y-Sing; Writing by Mark Bendeich; Editing by Tomasz Janowski

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