The Bank of Russia unexpectedly maintained its key interest rate at a record-high 21% , defying analysts’ expectations of another significant hike as inflation remains stubbornly elevated. The decision marks a shift toward a more measured approach in balancing economic growth and price stability. Key Details Inflation Concerns: Annual inflation climbed to 8.9% in November, well above the central bank’s 4% target , with inflation expectations reaching 13.9% in December. Policy Rationale: The central bank cited the significant tightening of monetary conditions after October’s 200-basis point hike as sufficient to resume disinflationary processes. Governor Elvira Nabiullina emphasized avoiding both economic overheating and severe slowdowns. Economic Overheating: Elevated government spending on the war in Ukraine and social programs, coupled with labor shortages and rising wages, have fueled strong domestic demand, exacerbating price pressures...
The Australia & New Zealand Banking Group (ANZ) has issued a cautionary report regarding Malaysia's need to rationalize its RON95 petrol subsidies in 2025, especially following a significant salary hike for civil servants. Here are the key points from the report:
Fiscal Burden and Subsidy Context
- Current Subsidy Situation: While the subsidy burden for RON95 has decreased compared to previous years, it remains at a high level. The government's recent decision to increase civil servants' salaries—by at least 13%, effective December 1, 2024—will add approximately RM10 billion to operational expenditures.
- Government Revenue Trends: Malaysia's revenue contracted by 6.3% in the first half of 2024 year-on-year, while expenditures grew by 1.3% during the same period.
Recommendations for Subsidy Rationalization
- Urgent Need for Change: ANZ emphasizes that the blanket subsidy on RON95 needs to be removed to prevent escalating fiscal pressures. This follows the recent removal of diesel subsidies, with similar rationalization for RON95 expected.
- Impact on Inflation and Monetary Policy: Any inflationary impact resulting from subsidy changes is anticipated to be perceived as a one-time adjustment by Bank Negara Malaysia, which is unlikely to prompt any changes in policy rates. The current overnight policy rate is expected to remain at 3.00% through the end of 2024.
Economic Growth and Budget Deficit
- Growth Prospects: Despite these challenges, the government is on track to reduce its budget deficit as a percentage of GDP to 4.3% in 2024 from 5.0% in 2023, aided by strong economic growth and lower crude oil prices.
Conclusion
The call for subsidy rationalization highlights a critical juncture for Malaysia's fiscal policy, balancing the need for sustainable financial management against public sector wage increases. As the government navigates these challenges, it must ensure that adjustments do not adversely impact economic stability or consumer sentiment.
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