Deflationary pressures to moderate in February as food inflation edges up

Published on 19 Mar 2019.

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RAM Ratings expects deflation to continue at 0.2% in February, although less steep than January’s 0.7%. The more moderate pace is underpinned by the food price component, which is envisaged to rise on the back of low-base effects. Price controls had been implemented during the lunar new year festive season in mid-February 2018, thereby taming inflation for food items. Given that the same festivities fell in early February this year, the timing mismatch may well have a notable base effect on this year’s inflation.

We have also revised this year’s inflation projection to 1.6%, from the initial 2.0%. “The lower headline inflation forecast for 2019 is driven by the recent reduction in the fuel price ceiling and also our revised expectations on the cost pass-through and spillover effects from the re-introduction of the Sales and Service Tax (SST) in September last year. Our analysis shows that these effects have been minimal thus far,” explains RAM’s head of research, Kristina Fong. 

Inflationary pressure should trend upwards in the second half of the year, in contrast to the more muted effects in 1H 2019. This trend would be mainly driven by the upward pressure from the proposed switch to targeted fuel subsidies - from the current blanket subsidy system - and low-base effects during the three-month zero-GST (Goods and Services Tax) period (June-August 2018).

RAM’s base-case scenario of an unchanged OPR of 3.25% this year had originally been premised on the significant downside risks to growth while balancing portfolio outflow pressures. With the US Federal Reserve’s more patient approach to monetary tightening now, the market has priced in at most two rate hikes this year, against the three communicated earlier. As such, Bank Negara Malaysia is expected to focus on the downside risks to growth, loosening domestic monetary policy if the risks to growth momentum become more pronounced. RAM will be closely monitoring economic developments and will revise our OPR projection if necessary.


Analytical contact
Woon Khai Jhek, CFA
(603) 7628 1093

Media contact
Padthma Subbiah
(603) 7628 1162


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Publication Date Published Category
Economic Insight: February 2019 CPI 19-Mar-2019 Economic Insight View PDF