OPR to gradually normalise to end the year at 2.25% - RAM Ratings

KUALA LUMPUR: RAM Rating Services Bhd (RAM Ratings) expects the overnight policy rate (OPR) to normalise gradually to end the year at 2.25 per cent in line with the pace of economic recovery, as secondary inflation risks remain limited at present.

The rating agency said that while increasingly widespread, the extent of price increases is currently less severe than that seen in previous rapid inflationary episodes.

"At the same time, second-round price effects or a wage-price spiral is not immediately evident as labour market conditions have yet to fully recover,” it said in a statement today.

Nevertheless, RAM Ratings said rising food prices is a policy concern as at least 20 per cent of the expenditure of most Malaysian households goes towards food. Further, the impact of the rising cost of necessities is disproportionately felt by the more marginalised segments of the economy.

It said the fiscal cost of managing subsidies and mitigating price pressures is substantial and higher oil-and-gas-related revenues would be insufficient to fully offset the fiscal strain, thus necessitating the realignment or consolidation of various operating expenditure items.

"This may have implications for some federal government-led support programmes,” RAM Ratings said.

It said inflation is expected to pick up in 2022 as the effects of ongoing global supply chain disruptions are transmitted to Malaysia’s consumer prices.

"The nature of the cost-push inflation limits the effectiveness of conventional monetary policy while the government’s various price control efforts will impose an exorbitant fiscal cost,” it added.

Meanwhile, the prices of raw commodities and their derivative products have escalated significantly.

Given the nature of current price pressures, RAM Ratings said, a near-term normalisation of inflation conditions is not expected.

"Domestic supply-side policies - such as improving domestic logistics and production capabilities, favourable trade agreements with suppliers of key commodities, and streamlining administrative bottlenecks - will be key in managing inflationary pressures this and next year,” it added. - Bernama