Malaysia’s inflation seen under control, expected at 2.1%-2.2% this year

PETALING JAYA: Domestic cost pressures will remain largely in check through 2015 in the wake of the collapse in global crude oil prices, economists said.

The increase in consumer price index (CPI), which is a gauge of inflation, will likely slow to only 2.1% to 2.2% this year, compared with 3.2% in 2014, before the pressure picks up again in 2016.

“Year-to-date, inflation averaged at 2% year-on-year (y-o-y) in the first eleven months of 2015, significantly lower than the 3.2% y-o-y increase recorded in the corresponding period last year in spite of the goods and services tax (GST) implementation.

“Looking ahead, the ringgit, which had weakened by more than 20% compared to a year ago, would likely push up the prices of imported goods.

“This, coupled with higher toll charges and an upward revision to administered gas prices as well as upon the normalisation of the base effect, will likely exert upward pressure on the headline inflation in the first half of 2016,” RHB Research chief economist Peck Boon Soon said in his report.

He, however, noted that the lingering weak energy prices would likely continue suppress the upward pressure on inflation rate, while slower consumption spending following the GST implementation and a downturn in the property sector as well as the elevated household debt, would likely dampen inflation pressure.

On balance, RHB Research said headline inflation was expected to rise to 2.7% y-o-y in 2016, from an estimate of 2.1% y-o-y in 2015.

MIDF Research, which also expected 2015 CPI growth to come in at 2.1%, concurred, noting that weak crude oil prices would cap CPI growth next year.

“With oil prices remain in lower territory and recovery remains weak, we maintain our inflation expectation for 2016 at 2.90%,” the brokerage said in its report.

Malaysia’s CPI growth accelerated to 2.6% y-o-y in November from 2.5% in the preceding month due mainly to increases in the prices of tobacco products and toll rates.

The increase in tobacco product prices took effect on Nov 4, while the toll rates in several highways the Klang Valley were raised in October.

According to MIDF Research, CPI growth in December would likely remain stable at 2.5% to reflect steady pump prices as a result of the decline in global crude oil prices.

“The recent announcement of the fare hikes for public rail transports such as KTM, Monorail and LRT which will take effect in December is seen to give minimal impact for inflation figure in December.

“This is due to the low contribution of this sub-sector to the inflation basket,” MIDF Research explained.

With inflationary pressure expected to remain manageable, economists said interest rates in the country would likely remain unchanged next year.

“Given that prices have stay intact and economic growth remains stable, Bank Negara is likely to maintain an accommodative monetary policy and the key rate will probably be retained at 3.25% during the next policy meeting,” AmResearch economist Patricia Oh said.

The upcoming Monetary Policy Committee meeting would be held on Jan 21.

“Inflation is unlikely to pose a threat going forward following the still-weak energy prices. As such, we expect the central bank to maintain the overnight policy rate stable at 3.25% in 2016,” RHB Research said.

It noted that Bank Negara remained concerned over the weak external environment and domestic demand.

“Although domestic demand will likely remain the main driver of Malaysian economic growth, private consumption is, however, expected to moderate, as households continue to adjust to the higher cost of living amid an uncertain economic environment.

“The weakness provides room for the central bank to ease its monetary policy,” RHB Research explained, while noting that the weak ringgit, coupled with the US interest rate up cycle, would, on the other hand, make it difficult for Bank Negara to cut interest rates.