Published on 23 Aug 2018.
RAM Ratings expects Malaysia’s headline inflation rate to inch up to 1.0% in July (June: 0.8%), underpinned by stronger inflationary pressure from the transport fuel component. The average price of RON95 petrol ascended 12.4% in July (June: 9.9%) amid low-base effects. Prices had averaged RM1.96/litre in July 2017 compared to RM2.00/litre in June 2017, against the currently subsidised level of RM2.20/litre.
Moving forward, price increases are expected to remain subdued with the zero-rating of Goods and Services Tax (GST), thereby limiting any further upside pressure against inflation. While the incoming Sales and Services Tax (SST) is expected to exert some cost past-through, the potential upside appears limited relative to the GST. “Our initial assessment of the SST and its potential inflationary impact does not indicate any destabilisation of prices or consumption for now. This is due to the SST’s smaller share of products in the CPI basket and because it applies to manufacturers rather than end-consumers directly,” explains RAM’s Head of Research, Kristina Fong. Furthermore, any destabilising effects from the SST should be contained by its single layer of taxation, the less restrictive administrative costs of implementation and proposed exemptions on raw materials, components and packaging for registered manufacturers.
In view of the deflationary pressure from the change in the taxation system, coupled with lower fuel prices from the reinstatement of fuel subsidies and a persistently weak growth trajectory for food prices, overall inflation is envisaged to average 1.3% this year.
Given the lower core inflation and moderating GDP growth (4.9%), there seems to be a downward bias for the OPR this year. Nonetheless, our base case remains - the OPR is expected to stay put at 3.25% through the rest of 2018 as lingering policy uncertainties and some macro risks may still pose a risk to capital outflows. That said, we believe that monetary policy will play a bigger role because fiscal consolidation is perceived as a key trend going forward; hence less scope for additional pump-priming.
Woon Khai Jhek, CFA
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