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August 23, 2008

Malaysia cuts fuel price as by-election nears
Malaysia announced a surprise cut in fuel prices on Friday, ahead of a key by-election and after news that annual inflation surged to 8.5 percent in July, well above expectations, reported Reuters.

Inflation hit the highest since December 1981, well exceeding economists' 7.8 percent forecast in a Reuters poll and June's 7.7 percent figure, data released by the government showed.

Malaysian inflation, long among the lowest in Asia, has taken off since the government cut fuel subsidies in June - a deeply unpopular move - and hiked electricity prices in July.

Yet few economists believe the central bank will raise interest rates when it meets on Monday and saw the partial reversal of fuel price rises as further reducing the chances of a rate rise.

"Our call remains that we would expect Bank Negara Malaysia to again hold rates steady at 3.5 percent in the upcoming Aug. 25 meeting, citing growth concerns," said Alvin Liew, economist at Standard Chartered Bank.

Economic growth is forecast to fall sharply from the 7.1 percent recorded in the first quarter of the year and is seen at 5 percent for the full year by the government.

The government said the price of petrol would fall to 2.55 ringgit ($0.763) per litre from 2.70 ringgit, a 5.6 percent drop. The price of diesel was cut to 2.50 ringgit from 2.58, a 3.1 percent drop, both effective from Aug. 23.

According to some economists, the central bank's decision to hold rates at 3.5 percent in July, where they have been for over two years despite the surge in inflation, damaged its credibility and showed it had buckled under government pressure not to hike at a time when it felt threatened by an opposition surge.

Malaysia's government is struggling under an onslaught from an opposition coalition which inflicted heavy losses on it at elections in March.

It faces a huge challenge on Tuesday when Anwar Ibrahim, the former deputy prime minister, who is now the effective leader of the opposition is seeking election to parliament after a 10-year absence following imprisonment for sodomy and corruption.

He has promised to unseat the government in a parliamentary vote in September if he wins in the by-election, which he is odds on favourite to do.

Rising petrol prices have stoked popular discontent and new charges of sodomy against Anwar have gained little traction in what has turned into a dirty campaign with charges of vote buying and corruption.

"The CPI is a very strong indicator of the burden that the people are forced to bear. If we can pass on the benefit of lower price early, why not?" said Domestic Trade Minister Shahrir Samad, who denied the move was related to the by-election.

The government earlier announced it would cut petrol prices from Sept. 1 under a new formula which has been bolstered by falling world prices. But some analysts criticised the change as a ploy to appease voters.

"With this new formula, prices can only go down but not up ... It's tantamount to a reversal of what they originally announced in June. The government should stick to the (original) formula," said Kit Wei Zhengfrom Citigroup. "It was well timed for the by-elections," he added.

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