KUALA LUMPUR (June 22): AmBank Research has raised the probability of Bank Negara Malaysia increasing its key interest rate by 25 basis points in the second half of 2017 (2H17) to 45% from 30% previously.

The renewed expectation, said AmBank Group chief economist Anthony Dass in an economic report today, came amid 4.2% headline inflation in the first five months the year, which is above the research house's full-year average of 4%.

“Cost pressure will remain as the key culprit in preventing inflation from sliding apart from the base comparison.

"Although the inflation data may have eased slightly in May, we still expect the overall inflationary pressure to stay in the coming months," said Dass.

Dass said Malaysia's headline inflation in May rose at a slower pace by 3.9% year-on-year (y-o-y) after growing above the 4% level since February 2017.

He said despite registering a slightly slower gain, inflation for the first five months grew 4.2%, which remains above the research house's full-year average of 4.0%.

"There were no major surprises on the inflation numbers. Cost pressures remain the key drivers i.e. (1) strong Producer Price Index numbers suggest transfer pricing remains; (2) costlier transport prices amid more expensive fuel; and (3) the weak ringgit against the USD explains the increase on core consumer price index," he said.

Dass explained that although the inflation data may have eased slightly in May, he still expects the overall inflationary pressure to stay in the coming months.

"Also, demand-pull inflation should kick in, especially with the improving economic activity reflected by the strong 1Q17 GDP of 5.6% y-o-y, healthy corporate earnings and firm labour market.

"Thus, it has raised our probability for the door to open slightly wider to a 45% chance from 30% previously for a rate hike by Bank Negara in 2H17 by 25 basis points," he said.