Published on 18 Sep 2018.
RAM Ratings expects Malaysia’s headline inflation rate to moderate to 0.3% in August (July: 0.9%), underpinned by weaker contribution from the transport fuel component. The average price of RON95 petrol only ascended 3.9% in August (July: 12.4%) amid dissipating low-base effects. Prices had averaged RM2.12/litre in August 2017 compared to RM1.96 in July 2017. The component’s growth should also ease through the rest of this year as low-base effects subside further. For the full year, overall inflation is envisaged to come in at 1.3% (2017: 3.7%).
The outlook on food inflation also still appears subdued for the rest of 2018, with the zero-rating of the Goods and Services Tax (GST), coupled with limited impact from the Sales and Service Tax (SST). While the SST is expected to elevate food inflation following the respective lows of 0.8% and 0.7% in June and July (the troughs since November 2009) during the 3-month tax holiday, the impact is not expected to be as widespread. Under the new SST regime, the majority of basic food items are either exempted or taxed at a lower rate of 5%. The number of eateries subject to the 6% service tax are also lower under the current SST regime due to the higher taxable threshold of RM1.5 million, compared to RM500,000 under the GST regime. These changes are anticipated to limit the upward pressure on overall food inflation.
We expect Bank Negara Malaysia (BNM) to maintain the OPR at 3.25% at its final monetary policy committee (MPC) meeting for the year in November, given the need to balance between capital outflows and GDP growth risks. The central bank’s neutral tone in its recent MPC statement also suggests that the rate is consistent with its current policy stance and any prevalent risk will need to be assessed further. “It will be a tough call for BNM at future meetings as the risks weigh on its OPR decision in opposite ways. There are still uncertainties which are difficult to fully account for in terms of impact,” notes Kristina Fong, RAM’s Head of Research. The volatile global capital markets, rising trade tensions, lingering policy uncertainties and some macro risks may give rise to capital outflows and downside risks against economic growth.
Woon Khai Jhek, CFA
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