Published on 17 Dec 2018.
RAM Ratings expects Malaysia’s headline inflation rate to ease to 0.3% in November, from 0.6% the preceding month. The expected decline is underpinned by dissipating low-base effects on retail fuel prices, as the price of RON95 petrol fell 4.5% y-o-y in November, as opposed to a 1.1% increase in October. On account of low food inflation and the deflationary pressure from the reinstatement of fuel subsidies through the rest of 2018, overall inflation is anticipated to average 1.0% this year (2017: 3.7%).
Looking ahead, headline inflation is projected to accelerate to 2.7% in 2019, mainly driven by additional pressure from the switch to targeted fuel subsidies, along with our expectation of continued spillover effects from the reintroduction of the Sales and Service Tax and low-base effects during the three-month zero-Goods and Services Tax period. That said, our inflation projection for 2019 will still depend on the implementation of the targeted fuel-subsidy mechanism in 2Q 2019; key details of its implementation (i.e. the exact date and the disbursement mechanism) are still scant. Another key risk to our forecast is the volatility of global crude oil prices. The pace of inflation in 2019 will largely depend on how effective the OPEC-led supply cuts will be vis-à-vis supporting global crude oil prices. “Based on our estimates, every USD5 move in the average price of Brent crude will alter headline inflation by approximately 0.3 percentage points in 2019, barring any second-round effects on prices,” notes RAM’s head of research, Kristina Fong.
We expect Bank Negara Malaysia to maintain the OPR at 3.25% in 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, US-China trade tensions and BREXIT uncertainties.
Woon Khai Jhek, CFA
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