Sept headline inflation expected to pick up slightly to 0.9%, says RAM

  • Economy
  • Wednesday, 24 Oct 2018

KUALA LUMPUR: RAM Ratings expects Malaysia's headline inflation to pick up slightly to 0.9% in September from 0.2% in August due to the reintroduction of the Sales and Service Tax.

The ratings agency said the deflationary trend for discretionary goods in the three-month tax-free window had put moderate downwards pressure on the headline figure.

"We expect this trend to gradually reverse as vendors adjust to the new tax system,” said RAM head of research Kristina Fong.

Some of the upward pressure is expected to be partly offset by the moderation in transport fuel inflation, which should continue to ease through the rest of the year as low-based effects subside further.

For 2019, headline inflation is expected to accelerate to 1.7% to 2.5%, with the higher end of the range hinging on the shift to a targeted fuel subsidy mechanism.

More targeted fuel subsidies as opposed to the current blanket subsidy will result in a higher market price of fuel, thus adding to headline inflation. 

Other possible contributions to inflation growth in 2019 could be a higher rate of cost pass-through by firms to consumers due to the higher cost of doing business and a slightly weaker ringgit versus the US dollar. 

RAM added that inflation could also pick up from the relatively benign estimate for 2018 as policy-induced effects subside.

"We expect Bank Negara Malaysia to maintain the benchmark interest rate at 3.25% through 2018 and 2019, given the need to balance between capital outflows and risks to GDP expansion. 

"Although headline inflation is envisaged to accelerate from the benign level of 2018, the pace of increase is still rather nondescript as a trigger point, relative to the downside risks to growth from ongoing fiscal consolidation, volatile capital markets and rising trade tensions," it said.