Benign inflation in 2021

Experts think Bank Negara may avoid tightening the country’s monetary policy settings next year.

PETALING JAYA: While Malaysia is expected to escape deflation in 2021 and see increased price pressures in the coming months, experts think Bank Negara may avoid tightening the country’s monetary policy settings next year.

According to CGS-CIMB Research, policymakers at the central bank are likely to remain cautious due to the uneven economic recovery.

As a result, the benchmark overnight policy rate (OPR) could be retained at 1.75% throughout 2021.

The research house forecasts a headline inflation of 1.6% in 2021 as compared to an estimated deflation of 1.1% in 2020.

In 2019, Malaysia’s headline inflation was registered at 0.7%.

Concurring with CSG-CIMB Research, Kenanga Research said that while the rate of inflation will likely turnaround next year, it would remain relatively benign at 1.7%.

“With the onset of positive vaccine sentiment and improving economic conditions we see a higher probability that the Bank Negara will keep the OPR unchanged at 1.75% at the next Monetary Policy Committee meeting.

“Risks remain tilted to the downside due to the continued surge in Covid-19 cases locally, ” it said in a note yesterday.

Based on the latest consumer price index (CPI) data for the month of November 2020, the country’s deflation worsened further as the CPI declined by 1.7% year-on-year (y-o-y).

This was the weakest inflation reading since June and was below consensus forecast.

Core inflation has also weakened further to 0.7% y-o-y in November as price weakness was relatively broad-based, with no CPI category reporting an annual price increase.

It appears that the reintroduction of the conditional movement control order (CMCO) in selected regions since October has taken a toll on demand-driven price pressures, according to CGS-CIMB Research.

However, PublicInvest Research thinks that the CPI could recover in December thanks to the easing of mobility in most parts of the country except in Kuala Lumpur, Sabah and Selangor.

“We are nevertheless wary over the possibility that the CMCO phase could be extended in these areas given the high daily number of new cases, dampening recovery.

“All else being equal, the CPI will be supported by the sustained recovery in oil prices that have remained on an upward trajectory, driving several pump price upward revisions in December, ” it said in a note.

Meanwhile, CGS-CIMB Research pointed out that demand weakness reverberates through the domestic economy.

It said it has observed disinflationary pressures radiating from discretionary items during the start of Covid-19 to more general non-discretionary areas in recent months, a likely by-product of subdued demand and heightened economic uncertainty.

“Housing costs, measured by rentals, rose 0.6% y-o-y and exceeded lows of the last three cycle troughs, namely Global Financial Crisis (1% y-o-y in March 2007), Asian Financial Crisis (0.9% y-o-y in Dec 1999) and post-dotCom crisis (0.7% in July 2002).

“Segments such as healthcare, education, recreation and culture as well as restaurants and hotels continue to experience erosion in pricing power as social distancing curbs deter demand, ” it said.