KUALA LUMPUR (March 23): Bank Negara Malaysia (BNM) has projected that headline inflation may rise to between 3% and 4% this year, compared to 2.1% in 2016, underpinned by higher global commodity and energy prices, coupled with the impact of the ringgit's depreciation.

In BNM's Annual Report 2016, it expects global oil prices to trend higher in 2017 following the decision by members of Organization of the Petroleum Exporting Countries and several other oil producing countries to cut crude production to ease the global oil glut.

This will translate to higher global oil prices, which, along with the fall in ringgit's exchange value, will indirectly result in higher domestic retail fuel prices.

As of first quarter of 2017, the price of RON95 petrol has been higher, averaging RM2.23 per litre, drastically above the average price of RM1.76 per litre recorded in 2016.

"The increase in fuel prices from their low base, coupled with a notable share of expenditure on fuel in the consumption basket of Malaysian households, will have a noticeable effect on headline inflation for the year," BNM said.

Besides oil, other global cost factors are also expected to put some upward pressure on domestic inflation.

While global food prices are expected to remain low due to the improved weather and supply conditions, the outlook for overall commodity prices is expected to register a modest rate of increase in 2017, underpinned by higher prices for agriculture and metal-based products.

BNM also said the inflation rates of Malaysia's major trading partners are also likely to register small positive increases.

"The strength of growth in both Malaysia and its trading partners could create upward or downward pressures on domestic inflation," it said.

However, the pass-through of these external price factors to domestic prices would be somewhat mitigated by the fact that domestic production and consumption contain relatively modest imported content, it said.

Hence, this cost-driven inflation is not expected to cause significant spillovers into the broader price trends in Malaysia, given stable domestic demand conditions. "Core inflation is, therefore, expected to increase modestly," the report read.