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Bank Negara Malaysia is likely to raise interest rates by 50 basis points in the second half of this year and another 100 basis points in 2011, according to Deutsche Bank Group.

"It is simply because inflation is returning to normal. It is coming back at two per cent in Malaysia," said the group's managing director and head of global markets research, Asia Pacific, Dr Michael Spencer.

"Given the concerns that in some parts that Asia's asset bubbles are potentially building up, I think it is reasonable for central banks to raise rates," he said at a media briefing on Malaysia's economic outlook in Kuala Lumpur today.

However, Spencer said that real interest rates are likely be lower at the end of 2010 than what they are currently.
"We also expect the US Federal Reserve to raise interest rates by 100 basis points in the third quarter," he said.

Spencer said that most Asian central banks are expected to start raising interest rates well before the US Federal Reserve and European Central Bank, which is also likely to start raising rates in third quarter.

"Our forecast of about 90 basis points of rate hike on average this year contrast with expectation of a 1.6 per cent increase in inflation between December 2009 and December 2010," he said.

According to Spencer, India, China and the Philippines will the first in the region to raise interest rates.

He said a spike in oil price inflation is likely to be over by mid-year and a return to more normal food price increases should bring the Asian inflation rate up to 3.6 per cent this year from 1.2 per cent in 2009.

Spencer said with the average inflation rate since 2004 at 3.7 per cent, the return of inflation should not be a major concern.

He expects the ringgit to strengthen against the US dollar on support from the inflow of capital into the country, saying that it is set to rise to 3.2 against the greenback in the next 12 months.

At midday today, the ringgit was traded at 3.351 against the US dollar.

On economic growth, Spencer said Malaysia is expected to register a 5.5 per cent growth this year, driven by domestic consumption.

"The biggest swing will be the contribution of domestic consumption," he said.

Private consumption is likely to be at 3.3 per cent this year and 4.0 per cent in 2011, Spencer said, adding that it was at 1.0 per cent last year. -- Bernama

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