RAM Ratings revises Malaysia 2021 inflation projection higher to 3% on sustained Brent crude prices

KUALA LUMPUR (April 22): RAM Ratings Services Bhd has revised its full-year inflation projection for Malaysia in 2021 to 3%, from 2.3% initially, on the back of higher sustained average Brent crude prices.

In a statement today, the rating agency highlighted that the average Brent crude price is pegged at US$60 per barrel this year versus its previous estimate of between US$45 and US$50.

"Oil prices have been stronger than expected this year, driven by positive sentiment, controlled output by OPEC+ and winter storm disruptions in the US.

"While prices are envisaged to moderate in the second half of the year (2H21) as production gradually increases, they should still be supported by stronger demand relative to 2020," it said.

RAM Ratings added that Brent crude prices remain a key driver of its inflation forecast for 2021.

The rating agency also pointed that the average price of RON95, a key driver to transport fuel inflation, climbed 17.6% year-on-year (y-o-y) to RM2.05/litre in March — a stark contrast to the 5.7% y-o-y contraction in February, amid higher crude oil prices and more pronounced low-base effects.

"Every US$5 movement in the average price of Brent crude is estimated to alter Malaysia's 2021 headline inflation by about 0.4 percentage point, barring any second-round effects on prices.

"However, the inflationary impact of further price increases beyond US$60/barrel is capped by the fuel price ceiling currently in place," it stressed.

"Meanwhile, inflation for all the other subcomponents is expected to remain subdued this year due to still sluggish demand and negative output gap.

"The electricity tariff rebate in 1H21 under the imbalance cost pass-through (ICPT) mechanism will also help mitigate some inflationary pressure," it said.

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