Is Malaysia Heading Towards Cost-Push Inflation?

Mar.13.08 | About: iShares MSCI (EWM)

Malaysia's Central Bank has been planting the seeds of inflation for many months. These seeds have grown into strong roots, taking the form of dangerously strong lending growth. Easy money, coupled with falling long rates and with a decelerating stock market have resulted in property speculation going through the roof.

In the real economy, domestic demand remains tepid, however; this means that demand-pull inflation cannot be just around the corner. No, as elsewhere, watch Malaysia descend into the volcanic pits of cost-push inflation, stemming from rising commodity prices and a falling exchange rate against key import partners like Australia, Japan and Europe. Whether the Central Bank will tighten now that elections are over is a moot point.

My guess, given Badawi's evident, sinking popularity, is that the Central Bank won't tighten until it is too late. Also, with a stronger opposition, he won't have quite as smooth a ride as before; such competition is good for democracy, even if we are not really friends of politicians anywhere...