Malaysia inflation to average 4-5 pct in 2008-council

KUALA LUMPUR, July 24 (Reuters) - Malaysian inflation is expected to average 4-5 percent this year due to higher fuel prices, but monetary policy may not be the best tool to tackle cost-driven inflation, a high-powered government council said on Thursday.

"The (central) bank stands ready to adjust monetary policy in the event the outlook for growth or inflation changes and the nature of the problem warrants a change in monetary policy," the National SME Development Council said in its annual report.

"Monetary policy is foremost a demand management tool," it said. The council, chaired by Prime Minister Abdullah Ahmad Badawi, is spearheading the development of small and medium-scale businesses in Malaysia.

"As such, other policy measures may be appropriate to mitigate cost-push price pressures emanating from rising global prices of food and commodities, in particular, if the problem is structural or caused by supply driven factors," it added.

Malaysia's annual inflation hit a 27-year-high of 7.7 percent in June following a 41 percent rise in petrol prices and a 63 percent increase in diesel prices in June.

This could put pressure on the central bank to respond this week with its first interest rate rise in two years.

The central bank had earlier forecast average inflation of 4.2 percent in 2008, which would be the highest since 1998, during the Asian financial crisis, when inflation averaged 5.3 percent.

Inflation averaged 2.0 percent last year.

The central bank will hold a regular monetary policy meeting on Friday. Economists surveyed by Reuters early this week were split on whether the authorities would raise the official rate -- now at 3.50 percent -- on Friday.