Inflation to remain soft in the near term, OPR to be maintained in 2018

February CPI was also affected by the drop in the transport group as fuel prices slipped.

PETALING JAYA: Inflationary pressure is expected to remain subdued in the near term which will allow Bank Negara to maintain the overnight policy rate (OPR) at the current level this year.

AmBank Group chief economist Dr Anthony Dass said on Thursday he believed that the potential inflationary pressure from the cost side would remain subdued due to the absence of the goods and services tax (GST) which will be replaced with the sales and services tax (SST), fuel subsidy and firm ringgit. 

“This should allow the central bank to maintain the OPR at current levels throughout 2018 which is our base case. However, liquidity remains healthy,suggesting that the demand pull inflation remains. Thus we reiterate our 45% chance of a rate hike in September,’’ he added.

Bank Negara has kept the OPR unchanged at its latest policy meeting, a day after the country held its 14th general election.

According to the bank, the prospects of economic growth remained strong, driven by the strength in both domestic and external demand. Many economists and analysts expect the central bank to retain the benchmark OPR at the current level of 3.25% for this year.

“With the GST to be zero-rated in June and the possibility of a 10% SST to be reintroduced in one to two months, we expect a downwards bias on inflation. 

“Furthermore, the current retail pump prices with RON95 and RON 97at RM2.19 per litre and RM2.46 per litre respectively and diesel at RM2.17 per litre are expected to remain.

“Besides, the ringgit which appreciated against the US dollar by 11.8% year-on-year (y-o-y) in April, will remain firm with the downside on ringgit around 2% –4% and this will keep inflationary pressure at bay,’’ Dass noted.

April headline inflation of 1.4% y-o-y (1.3% y-o-y in March) came in slightly lower than AmBank Group's as well as market expectations of 1.5% and 1.6% respectively. 

Meanwhile, the underlying inflation eased for the third straight month to 1.5% y-o-y from 1.7% y-o-y in March.

Average headline inflation for the first four months is 1.7% y-o-y. It is below our projection of 2.5%–2.8% as well as central bank’s current estimate range of 2%–3% for 2018.