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This article first appeared in The Edge Financial Daily on April 19, 2018

KUALA LUMPUR: The country’s headline inflation for March receded further to 1.3% year-on-year (y-o-y), a 20-month low since July 2016, just ahead of a fiercely contested 14th general election on May 9.

The Consumer Price Index (CPI) surprised on the downside as it came in below Bloomberg’s consensus reading of 1.6%.

Based on the data provided by the statistics department, the decline was led by the transport group, which fell by 1.5% y-o-y, while both communication, and clothing and footwear fell by 0.7% each.

Alan Tan, Affin Hwang Investment Bank Bhd’s chief economist, told The Edge Financial Daily that the country is undergoing a normalisation period compared with the high base seen in the previous year.

“It is a reflection of stable commodity prices. The domestic retail petrol price is lower compared with a year ago. The stronger ringgit has also helped cushion the prices of imported products. We’re also coming from a high base given that the inflation level in March last year was the highest seen in over eight years,” Tan said.

He shared that inflation is likely to pick up in the second half on the back of a stable economy and healthy domestic demand, but if oil prices were to hover at current levels, the average inflation for the year could come in at the lower end of the central bank’s official forecast of 2% to 3%.

Similar to Tan, UOB Malaysia’s senior economist Julia Goh said that the moderation in the country’s inflation is mainly due to lower food and non-alcoholic beverages, utilities and transport costs relative to a year ago.

“Petrol prices fell 4.4% compared with the same period last year. Although Brent crude prices inched up to average US$67 (RM260.63) per barrel in March, this was offset by the stronger ringgit as US dollar/ringgit reached 3.90, appreciating 13.6% from 4.43 a year ago,” Goh said in her note after the data was released yesterday.

Michelle Chia, an economist with CIMB Investment Bank Bhd, also pointed out in her report that the transport index, which slipped further into deflation in March, has dragged down headline inflation for the month.

“The transport index slipped deeper into deflation in March (-1.5% y-o-y versus -0.3% y-o-y in February), weighed down by the fuel sub-index (-3.7% y-o-y versus -1.6% y-o-y in February), and vehicle purchase (-0.2% y-o-y versus 0.2% y-o-y in February). We expect the drag from fuel prices, which account for 8.5% of the CPI, to abate in April, as average retail fuel prices were stagnant on a month-on-month and y-o-y bases,” Chia said.

She also noted that the price gain in food index ebbed to 2.8% y-o-y in March compared with 3% y-o-y in February, as inflation of food consumed at home and food away from home both moderated.

“We believe the combined effects of muted global commodity price trends and a stronger ringgit have helped curb food prices,” Chia added.

CIMB has trimmed its inflation forecast for 2018 to 2.6% from 2.9%, which represents a sharp moderation from the 3.7% seen in 2017.

 

Rate hikes off the table

As inflation pressures remain steady, most research houses are expecting Bank Negara Malaysia (BNM) to maintain its current monetary policy with rate hikes off the table, implying that the overnight policy rate (OPR) could remain at 3.25% for the rest of the year.

Nomura Global Markets Research has forecast the average CPI inflation for the full year at 2.5%, which is in the middle of BNM’s 2% to 3% range while core inflation should remain broadly stable at around 1.8% in April and May before rising slightly in June, averaging about 2% for the full year, slightly lower than 2017’s 2.3%.

“This supports our forecast for BNM to leave its policy rate unchanged at 3.25% for the rest of this year. Not only is core inflation still low, but GDP (gross domestic product) growth also remains on track to moderate this year to 5.5% from 5.9% in 2017, in our view. Financial imbalance risks are also easing, as measured by our proprietary indicator, which should further reduce the need for more rate hikes,” it said.

MIDF Research also agreed that the central bank is unlikely to increase the OPR for the rest of 2018 except if there is any pleasant upward surprises in domestic economic growth. The research house maintained its average inflation forecast at 2.6% for 2018 as it anticipated inflationary pressure particularly from fuel-related items to soothe, consistent with the steady gradual rise in global commodity prices on top of pass-through effects from a strengthening ringgit.

CIMB’s Chia also agreed that the weak inflation environment would push the timing of the next OPR hike into 2019 despite further tightening of the US’ monetary policy.

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