Published on 23 Apr 2019.
RAM Ratings expects consumer prices to rise 0.2% in March, marking a return to an inflationary trend after two consecutive months of deflation. The acceleration is underpinned by more moderate deflationary pressure from the transport component. The average price of RON95 petrol declined at a slower pace of 5.4% in March, from the preceding month’s 12.1% contraction. Given the government-imposed price ceiling of RM2.08/litre, however, deflationary pressure from the transport fuel component is expected to linger until the implementation of the targeted fuel subsidy scheme.
Looking ahead, overall inflation is projected to accelerate to 1.6% in 2019, from last year’s 1.0%. That said, inflationary pressure is not envisaged to be evenly spread out through the year. The greater inflationary pressure this year is only envisioned to kick in during the second half due to the additional pressure from the switch to targeted fuel subsidies and the low-base effect during the zero-GST period in 2H 2018. This will have a compounding effect on the upward pressure from the spillover effects vis-à-vis the reintroduction of the Sales and Service Tax in September 2018.
RAM is maintaining its base-case scenario of an unchanged OPR of 3.25% in 2019, given the need to balance between capital outflow pressures and growth support. “While mounting growth concerns have made a stronger case for a rate cut, the risk of capital outflows has also heightened amid intentions of either excluding or lowering the weight of Malaysian bonds in global bond benchmark indices. The key trigger of looser domestic monetary policy remains the risks to domestic growth arising from a significant global downturn,” notes Kristina Fong, RAM’s head of research. So far, domestic demand has stayed healthy, with some upside potential following the Government’s decision to resume the East Coast Rail Link project and a boost from increased foreign direct investment interest. RAM will closely monitor economic developments and revise our OPR projection if necessary.
Woon Khai Jhek, CFA
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