UPDATE 2-Malaysia may review fuel subsidies after oil spike

(Adds finance ministry quotes in para 8)

KUALA LUMPUR, Sept 13 (Reuters) - Malaysia signalled a possible review of fuel subsidies on Thursday because of surging crude oil prices, but saw no need to reassess monetary policy.

Prime Minister Abdullah Ahmad Badawi said after a meeting with his central bank chief that the spike in oil prices to a record $80 a barrel was a serious development for fiscal policy.

"We have not decided whether we want to raise the price," Abdullah told reporters. "We are observing the situation now. We know this is going to be a very serious development."

Malaysia is a major non-OPEC oil producer and exporter.

The government subsidises fuel prices, especially diesel used by farmers and fishermen, by fixing them below market prices and then reimbursing suppliers so they can make a profit. As the cost of oil rises, the strain on the budget grows.

Overall subsidies are estimated to cost the government 12.2 billion ringgit ($3.49 billion) this year, or 10 percent of total operational spending, with fuel subsidies the biggest component.

But Malaysia's finance ministry said on Thursday the government was committed to progressively cut its fiscal deficit and was confident of achieving a deficit of 3.1 percent as targeted in 2008.

Abdullah, who is also the Finance Minister, said he was mindful of a government commitment not to raise fuel prices for the rest of 2007 but added: "At the same time, we are also studying very carefully ... how big is the negative impact it may have on our economy."

Central bank chief Zeti Akhtar Aziz told reporters there was no need to reassess monetary policy and that the economy was able to absorb the impact of rising oil prices.

"We have to monitor whether it will remain at a high level for a long time, and then we will make an assessment on what impact it will have on the economy," she told reporters.

"However, we have to take note that we are starting from a point where the inflation rate is very low and therefore we have the capacity to absorb the impact."

Inflation has halved from early this year and is running at 1.6 percent. Malaysia also has one of Asia's lowest official interest rates, with the overnight rate at 3.5 percent.

"Our policy will be based on conditions in our economy," Zeti said. "Therefore, we consider our interest rate, currently at an appropriate level, is still very supportive of our economy." ($1=3.492 Malaysian Ringgit)