This article first appeared in The Edge Financial Daily on March 21, 2018

KUALA LUMPUR: RAM Rating Services Bhd expects Malaysia’s headline inflation rate to ease markedly to 1.8% in February 2018, following two consecutive months of declines from 2.7% in January 2018 and 3.5% in December 2017.

The rating agency attributed the lower inflation in February to a negative growth contribution from transport fuel amid lower retail fuel prices and high-base effects from the previous year.

“The average price of RON95 fell two sen to RM2.26 per litre in February 2018, in contrast to the sharp upward revision of 20 sen to RM2.30 per litre in February 2017,” said RAM in a statement yesterday.

“As the high-base effect is expected to continue moderating contribution from the transport component, headline inflation is envisaged to ease to 2.5% in 2018 from 3.7% last year,” it added.

RAM noted that, however, the price growth of the food and non-alcoholic beverage component is expected to persist this year.

Nevertheless, the average growth of this component is expected to come in slightly lower at 3.7% this year, compared with the 4% charted in 2017, it added, as some of the one-off cost-push factor fades.

“The [food and non-alcoholic beverage] component is also envisioned to remain the key driver of headline inflation given its significant weight in the consumer price index basket.

“The food and non-alcoholic beverage component still carried a significant weight of 29.5% in January 2018, despite having been revised downwards from 30.2%,” it said.

And while the effective average natural gas tariff in the first half of 2018 is 23.6% higher year-on-year, RAM said there is as yet no broad-based notable uptick in consumer prices.

“This indicates that businesses have likely not passed on the cost increase, as they assess and devise an optimal pricing strategy. We will continue monitoring the market’s willingness to pass on this cost increase to assess the risk to overall inflation in 2018,” it added.

Based on its expectations of a more moderate gross domestic product (GDP) growth and inflation of  5.2% and 2.5% respectively in 2018, RAM said it does not envisage further hikes in the overnight policy rate this year.

“Another rate hike may be warranted if GDP growth surprises on the upside and inflationary risk heightens,” it said.