Bank Negara said prices had been on an upward trend, contributing to higher inflation globally.

'Consequently the impact of these developments on inflation in Malaysia is expected to be felt in the first half of 2008,' it said in a statement.

The central bank maintained its overnight policy rate at 3.5 per cent, where it has stood since April 2006.

'The latest indicators show strong domestic demand will provide the support for the Malaysian economy to perform well in the coming months,' it said in a statement.

'The demand for financing by businesses and consumers remain strong, with robust investment activity as corporations expand capacity, and steady consumption growth also being supported by a stable employment environment and growth in incomes.'

The risks to the Malaysian economy are primarily from the external sector, it said.

However, Bank Negara said a slowdown in global growth is expected to ease some of the inflationary pressures.

Rising prices are a major headache for the government, which will contest general elections on Mar 8.

The ruling coalition touted its economic credentials in a policy manifesto launched on Monday, in a bid to ease public anger over high inflation and an anticipated shake-up of expensive fuel subsidies.

'When oil prices go up, we must have an action plan to reduce the burden of the people,' Prime Minister Abdullah Ahmad Badawi said.

'We want to ensure that the people do not suffer.'

The consumer price index rose 2.0 per cent over 2007. -- AFP