Published on 22 Nov 2018.
RAM Ratings expects Malaysia’s headline inflation rate to trend higher but still remain benign at 0.5% in October (September: 0.3%), while prices are still adjusting to the reintroduction of the Sales and Service Tax (SST). Overall inflation is envisaged to average 1.0% in 2018 (2017: 3.7%) amid low food inflation, on top of the deflationary pressure from the reinstatement of fuel subsidies through the rest of 2018.
Looking ahead, headline inflation is expected to accelerate to 2.7% in 2019, mainly driven by additional pressure from the switch to targeted fuel subsidies, along with our anticipation of continued spillover effects from the reintroduction of the SST and low-base effects during the zero-GST period. Although key details on the implementation (exact date and disbursement mechanism) are still scant, our preliminary analysis indicates that the decision to float the price of RON95 based on the Automatic Price Mechanism will lift headline inflation by 0.9 percentage points in 2019. We have conservatively assumed that the new mechanism will commence in early 2Q 2019 (i.e. April as opposed to May or June) and that global oil prices will average around the same level next year at USD75/barrel.
We expect Bank Negara Malaysia to maintain its benchmark interest rate at 3.25% throughout 2019, given the need to balance between capital outflow pressures and growth support. Although headline inflation is envisaged to accelerate next year, the pace of increase will still be rather nondescript as a trigger point, relative to the downside risks to growth from ongoing fiscal consolidation, volatile capital markets and rising trade tensions.
Woon Khai Jhek, CFA
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