SAN FRANCISCO, April 14 — Malaysia’s central bank governor Tan Sri Zeti Akhtar Aziz said the country’s accelerating inflation did not make her nervous, signalling confidence price increases would remain contained.

“We don’t see these second-round effects emerging” from faster price increases, Zeti, 66, said in an interview in Washington on Saturday. “We know the source of the inflation. It is not induced from strong demand, because this is a period when demand is quite modest.”

Bank Negara Malaysia has kept its key interest rate at 3 per cent since early May 2011 even as higher fuel prices and power tariffs spurred the fastest inflation in almost three years. Central bankers around the world are on alert for threats to the global recovery as the International Monetary Fund cut its 2014 growth forecast and urged emerging markets to prepare for flows of capital back to advanced nations.

Signs of financial imbalances would also factor into policy decisions, because a prolonged period of accommodation could encourage investors to misprice risk and misallocate resources, Zeti said.

State subsidies

“The situation is very dynamic, and so we would look at very closely these developments going forward,” she said. While those risks were not significant for now, the central bank needed to be “anticipatory” and “will continue to monitor” them, she said.

Consumer prices in Southeast Asia’s third-largest economy rose 3.5 per cent in February from a year earlier after authorities cut state subsidies to rein in the fiscal deficit. Inflation would probably accelerate somewhat next year as a result of tax increases and then moderate to about 3 per cent in 2016, Zeti said.

One-year interest-rate swaps closed at 3.52 per cent on April 11, the highest since July 2011 and signalling the central bank may increase borrowing costs by 50 basis points in the next 12 months. The swaps fell 2 basis points as of 11.08am local time.

Bank Negara will probably raise interest rates by 25 basis points to 50 basis points by the first quarter of 2015, according to Vishnu Varathan, a Singapore-based economist at Mizuho Bank Ltd.

“The central bank would need to anchor inflationary pressure before the implementation” of a goods and services tax next year, said Ho Woei Chen, a Singapore-based economist at United Overseas Bank Ltd. “We expect inflation to be higher in the first half than the second half of this year.”

Investment growth

The economy would grow 4.5 per cent to 5.5 per cent in 2014, after expanding 4.7 per cent in 2013, the central bank said on March 19. The prediction compares with the government’s previous range of 5 per cent to 5.5 per cent.

Growth in investment “is expanding the capacity of the economy”, Zeti said. “When you expand the capacity and you have moderating demand, consumption demand, that doesn’t produce an inflationary condition.”

Zeti indicated that Malaysia had weathered well the policy changes at the US Federal Reserve, which have spurred capital outflows across emerging-market economies. Fed officials began to signal about a year ago that they might start scaling back their asset-purchase programme, and announced in December they would begin to trim monthly purchases of bonds.

Ringgit decline

“We fared better than we expected” and “there was no disruption in credit flows”, Zeti said. “It did not have an effect on our real economy.”

The ringgit’s decline, a consequence of those outflows, had not made it harder to keep inflation in check, she said. The Malaysian currency had not weakened “that much”, Zeti said.

The ringgit fell 0.3 per cent against the US dollar today, and has declined about 6.4 per cent in the past 12 months, data compiled by Bloomberg show.

Zeti said the ringgit should not be internationalised until a developed domestic foreign-exchange market was in place. Major changes should not be introduced in unstable times such as these when central banks across the world were beginning to normalise policy, she said.

Zeti has served as head of the Malaysian central bank for 14 years. Asked about her plans after her current five-year term ended in 2016, she said she had not thought “that far ahead”.

“I look at the things that I would like to do and achieve, and quite a lot of them have been done already,” she said. “There are just one or two things that I would like to do” before stepping down, such as completing her work on Islamic finance, she said. — Bloomberg