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Malaysia inflation an declining trend

BMI, a Fitch Solutions company, predicts Malaysia’s headline inflation will continue to ease due to high base effects from last year’s surge in global food and energy prices. Malaysian Government subsidies and price-control measures will also cap further price increases.

The research arm expects no further rate hikes by Bank Negara Malaysia in 2023, given the 3.1% core inflation.

The recent decline in inflation aligns with a historical average of 2.0%, reducing the pressure for immediate monetary policy actions. BMI also revised its forecast, expecting inflation to fall back to 2.0% by year-end and an average of 2.7% for 2023.

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MALAYSIA: Malaysia’s headline inflation will continue to ease due to high base effects from last year’s surge in global food and energy prices triggered by the Russia-Ukraine war, according to BMI, a Fitch Solutions company.

In addition, government subsidies and price-control measures will also help to place an implicit cap on further price increases.

Overall, inflation in Malaysia has been lower compared to regional peers as inflation in Indonesia, the Philippines, and Singapore came in at 3.5%, 5.4%, and 4.5%, respectively in June.

The research arm does not expect the central bank of Malaysia, Bank Negara Malaysia (BNM) to hike rates further in 2023 even though core inflation is at 3.1% year-on-year (y-o-y), higher than the five-year average of 1.6%.

“Meanwhile, since the 25bps surprise hike in May this year, real interest rates in Malaysia have turned slightly positive (see right-hand-side chart above) and we believe the current policy stance is sufficient to keep inflation in check,” it said in a statement today.

In addition, unlike some other central banks, BNM does not have a specific inflation target. However, the headline inflation number is moving closer to the 10-year average of 2.0%, which means inflationary pressures are not escalating significantly and are aligning with the historical average.

As a result, it reduces BNM’s pressure to take immediate monetary policy actions to address inflation concerns.

The research house said BNM is not likely to reduce interest rates at a time when the US Federal Reserve (US Fed) is still increasing interest rates.

“The reason behind this cautious stance is the concern that cutting rates while the US Fed is tightening could lead to a weakening of the Malaysian currency,” it said.

Given the faster-than-expected easing of prices, the research arm lowered its forecast for inflation to fall back to the 10-year average of 2.0% by year end, which is lower than our previous forecast of 2.5%.

“Consequently, we also revised our forecast for average inflation for 2023 down from 2.9% to 2.7%, which is much lower than the 2022 average of 3.4%.”

“As BNM navigates the end of the global rate hike cycle, falling inflation, and persistent growth headwinds, we expect the central bank to stand firm in the upcoming meeting in September 2023.“

“We expect BNM to revise their current forecast for headline inflation in 2023, which is currently projected to be in the range of 2.8% to 3.8%. The anticipation is that BNM will likely lower this forecast in the coming months,” it said.

In line with consensus estimates, Malaysia’s inflation eased from 2.8% y-o-y in May to 2.4% in June, registering the lowest inflation rate recorded since the beginning of the year.

“The decline was driven by slower price increases in ‘food & non-alcoholic beverages’ category, which rose by 4.7% y-o-y in June, lower than the 5.9% increase recorded in May.

“In month-on-month terms, inflation increased by 0.2% which was influenced by the “communications” category, which went from deflation of -2.3% in May to a slight increase of 0.1% in June.”

“Core inflation, which excludes volatile items and those with government-administered prices slowed as well, from 3.5% y-o-y in May to 3.1% in June,” it said.

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