KUALA LUMPUR: AmBank Research expects Bank Negara Malaysia’s monetary policy committee (MPC) to retain the overnight policy rate (OPR) at 3.25% for the rest of this year due to the lower inflationary trends.
It said on Thursday its forecast was based on the current inflationary trajectory and Bank Negara’s outlook during the recent MPC meeting which cited that the headline inflation may fall into negative territory.
However, the research house did price in a low possibility for a rate cut which has increased from near zero to 20%.
“Our argument is that we are currently sitting on a positive real returns with a gap around 1.65% which justifies a rate cut of as much as 50bps in a move to support the economic growth.
“However, we feel such move will go against the current tide of rate hike not only in the US but also several countries in this region. Such an opposing trend will intensify the weakening pressure on the ringgit and equity markets.
“Besides, we feel the 2018 GDP for Malaysia should fall within our forecast of 5.5% with the lower end at 5.3%. While the probability is still low for a rate cut, we revise downwards our inflation projection to 1.5% from 2.1%,” it said.
AmBank Research said headline inflation in June grew at a slower pace by 0.8% year-on-year compared to 1.8% year-on-year in May, bringing the 1H2018 average to 1.6%.
Core inflation rose 0.1% year-on-year in June versus 1.5% year-on-year in May, translating to 1.5% in 1H2018.
The slower inflation was largely due to softer prices of food and non-alcoholic beverages and broad utilities which increased by 0.8% year-on-year and 1.5% year-on-year compared to 2.2% year-on-year and 2.1% year-on-year respectively.
However, transport prices accelerated in June, up 5.5% year-on-year in June from 3.8% year-on-year in May due to costlier fuel prices.
The pump prices for RON95, RON97 and diesel climbed 9.5%, 13.7% and 13.0% year-on-year respectively despite unchanged prices on a monthly basis.
Higher pump prices was due to the gain in West Texas Intermediate and Brent prices up 48.9% year-on-year and 59.7% year-on-year respectively. Also the tax holiday was seen as the main reason for the weak inflation.
AmBank Research said as Malaysian consumers enjoy the tax holiday up to end-August, added with subsidised fuel prices, it foresees a lacklustre price pressure.
“This should help boost disposable income and fuel private consumption in the economy. We believe the impact of replacing the Goods and Services Tax with the Sales and service Tax will be less painful, and expect the impact to be transitory without significantly deviating from the current weakening trend in inflation,” it said.