Bank Negara said today it expected economic growth to strengthen to six percent this year on stronger exports, and an upturn in the global semiconductor industry.

Bank Negara Malaysia said real gross domestic product was expected to accelerate to 6.0 percent in 2006, citing improvements in the external environment after a slowdown to 5.3 percent in 2005.

Central bank governor Zeti Akhtar Aziz said growth in 2006 would be supported by broad-based expansion in all sectors of the economy amidst resilient domestic demand, and led by manufacturing and services.

"This will strengthen further the structure of the economy and its potential for sustained growth over the medium term," she said on the release of Bank Negara's annual report.

Growth in manufacturing, which contributes a third of the economy, will increase to 7 percent from preliminary figures of 4.9 percent in 2005 led by the electronics and electrical segments.

Growth in services will decline to 6.0 percent from 6.5 percent in 2005, while agriculture will moderate to 2.0 percent against 2.1 percent.

Mining will surge to 5.0 percent from 0.8 over an improvement in crude oil output and an increase in natural gas output, said the central bank.

Construction will be at 1.0 percent after recording negative growth for two straight years, with minus 1.6 percent for 2005, on the back of an improved civil engineering sector and public projects from a forthcoming government five-year development plan.

Private sector investment is expected to slow to 10.0 percent from 10.8 percent in 2005, while public investment is seen increasing to 2.7 percent from 0.4 percent.

Inflation at six-year high

Inflation, which hit a six-year high of 3.7 percent in August over high oil prices, was expected to rise further this year but would be "manageable".

The central bank said it expected to see the effects of the country's highest-ever oil price rises in February, with inflation to peak in the first half of 2006 before easing in the third quarter.

The central bank has forecast inflation at 3.5 to 4 percent for 2006, up from 3.0 percent for 2005.

"In Malaysia, not withstanding the increase in prices in response to the rise in energy prices, the rate of inflation has remained within a manageable range," said the central bank governor.

"The rate of inflation is expected to rise further before it moderates during the latter part of the year," she said.

Bank Negara has raised its key interest rate, the overnight policy rate, twice in the last five months to curb inflation and Zeti did not rule out further increases from the current 3.25 percent.

"Going forward, monetary policy will respond appropriately to ensure sustainable growth in an environment of price stability," she said.

Malaysia in July 2005 removed its RM3.80 peg to the US dollar, imposed in 1998 during the Asian financial crisis, replacing it with a managed float instead.

The ringgit has since appreciated some 2.9 percent from its previously pegged value to the dollar, but Zeti said the central bank would not intervene unless it saw volatility in the exchange rate.

"The central bank does not target any particular level of the exchange rate, and intervenes only to smoothen exchange rate volatility, in particular, when large short-term capital flows create excessive movements in the exchange rate," she said.