Better External Demand to Support Growth- By JASON NG And JAKE MAXWELL WATTS 

Malaysia’s economy growth should grow 4.5% to 5.5% this year on stronger exports, but it faces risks of rising inflation and softer domestic demand, the country’s central bank said Wednesday.

A recent recovery in exports is supporting Malaysia’s growth, after two years during which external demand fell sharply. Domestic demand, which drove the economy to 4.7% growth in 2013, is expected to moderate this year, Bank Negara Malaysia said in its annual report.

“The Malaysian economy is expected to remain on a steady grown path in 2014,” Gov. Zeti Akhtar Aziz said at a press briefing on the report. “Domestic demand will remain the key driver of growth, albeit at a more moderate pace.”

The central bank’s forecast compares with a government prediction of 5% to 5.5% growth this year.Uncertainties in the global economic recovery remain a risk to growth, the central bank said.However, export performance is likely to pick up, in line with global demand, said Ms. Zeti, and both private consumption and investment would be robust.”Private consumption will be underpinned by healthy labor market conditions and sustained income growth,” she said.

Inflation will likely fall in a range of 3% to 4%, above the historical average, due to reductions in various government subsidies, but monetary policy is “not the best tool to manage the situation” because it is meant to control demand, the central bank said in the report.

The government last year scrapped subsidies on diesel and sugar and reduced some subsidies on a widely used gasoline variant to reduce the fiscal deficit. The moves pushed up prices in the broader economy.

“Higher cost-push inflation could lead to inflation expectations becoming unanchored and could, in turn, lead to wage growth that is not consistent with productivity growth,” the central bank said. This could lead to a “significant” increase in inflation, it cautioned.

A monetary-policy response would be appropriate if signs point to inflation becoming “more pervasive and persistent,” the central bank said.

Bank Negara Malaysia has kept its overnight policy rate steady at 3% since mid-2011, taking comfort from steady economic growth and benign inflation.

?Volatility in financial markets triggered by the withdrawal of central bank stimulus spending in the U.S. had hit Malaysia in line with the wider region, says Ms. Zeti, but adds that the country remains strongly positioned to weather more volatility in the year to come.

Source: THE WALL STREET JOURNAL(Exact Quotation)