• Malaysia’s CPI increased for the fifth consecutive month in August, coming at 4.7% year on year (y-o-y), compared with an increase of 4.4% in July.
  • Malaysia’s inflationary pressures are deemed benign relative to that of advanced economies and some regional peers such as Singapore, Thailand and the Philippines, mainly thanks to the huge blanket subsidies provided by the government.

KUALA LUMPUR (Sept 23): Malaysia’s inflation may have peaked in August as the impact of price adjustments for various price-administered items and minimum wage hikes could have been fully reflected since May, said economists.

However, the base effects will still keep consumer price index (CPI) growth above 4.0% for the rest of the year, before decelerating towards the 2% level in 2023, said economists Julia Goh and Loke Siew Ting of UOB Global Economics & Markets Research in a report released on Friday (Sept 23).

This will bring full-year inflation to an average of 3.5% for 2022 and 2.8% for 2023, barring any changes in domestic policy, particularly the existing blanket fuel subsidies, electricity tariffs, and ceiling prices for staple food, said Goh and Loke in the report.

“In other words, volatile global commodity prices, prolonged supply chain disruptions, domestic policy changes and persistent currency weakness reman wildcards for the inflation outlook,” they said.

Malaysia’s CPI increased for the fifth consecutive month in August, coming at 4.7% year on year (y-o-y), compared with an increase of 4.4% in July. The August rate also came in a tad lower than UOB Global Economics’ estimate of 4.8% y-o-y, but matches with Bloomberg consensus.

The rate also marked the highest reading since April 2021, as consumer prices continuously lifted by costlier food and beverages, housing, utilities and other fuels, household equipment and appliances, recreation services and culture, and restaurants and hotels, amid base effects.

Nevertheless, despite the consistently high CPI, Goh and Loke believes that Bank Negara Malaysia (BNM) would take a more cautious approach when it comes to raising its policy rate to rein in inflation, despite its peers in the region as well as the developed world acting more forceful to keep price increases in check.

Malaysia’s inflationary pressures are deemed benign relative to that of advanced economies and some regional peers such as Singapore, Thailand and the Philippines, mainly thanks to the huge blanket subsidies provided by the government.

Therefore, while other central banks in the region have been forceful in their responses to rein in inflation, Goh and Loke believe that BNM will tread more cautiously, while monitoring the effects the three 25 basis points (bps) rate hikes this year has had on the economy and inflation, before deciding on the next move.

Measures announced in the upcoming Budget 2023, particularly on subsidies, could also steer the rate decision at the next BNM monetary policy meeting on Nov 2 and 3. BNM had signalled in the September monetary policy statement that they are not on a preset path to raise rates continuously, and there was room for an intermittent pause.

“This reaffirms our view for BNM to hold policy rates at 2.5% for the rest of the year, before resuming its rate hikes to 3.00% by mid-2023, should growth conditions hold up,” said Goh and Loke in Friday’s report.

On the other hand, MIDF Research believes that BNM is very likely to raise its policy rate by another 25bps in the last monetary policy meeting in November, due to core inflation that continues to increase and reached a new peak of 3.8% y-o-y in August, amid strengthening domestic demand.

On a month-on-month (m-o-m) basis, core price still recorded a positive growth of 0.6%, noted MIDF Research in its Economic Review Report dated Friday.

One of the most noteworthy aspects of the CPI is that food inflation had also increased firmly to 7.2% y-o-y, which according to MIDF Research, was the highest ever recorded.

As a net-food importer, depreciation of the ringgit against the greenback by -5.5% y-o-y in August, which was close to a 5-year low, had partially caused the food inflation spike, said MIDF Research.

“With the Fed set to raise its funds rate higher than expected, we foresee [the] ringgit to stay in a weakening trend at least until 4QCY22.

“Moving forward, we expect Malaysia’s domestic food inflation to decelerate at a moderate pace in 2HCY22, following the steady deceleration of global commodity prices, particularly agriculture-related prices,” said MIDF Research in the report.

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