KUALA LUMPUR (March 28): Bank Negara Malaysia (BNM) has projected Malaysia's 2018 headline inflation to average between 2% and 3% after taking into account a higher base in 2017 and stronger ringgit. BNM said the country's headline inflation is expected to moderate in 2018 from 3.7% in 2017.

BNM said today in its 2017 annual report that while global energy and commodity prices are expected to rise in 2018, the country's higher inflation base in 2017 will result in a smaller contribution to headline inflation.

"In addition, a stronger ringgit exchange rate compared to 2017 will partially offset the impact of higher global energy and commodity prices. It will also contain increases in import costs. Given the dependency of domestic inflation on the trajectory of global oil prices, there remains a high degree of uncertainty surrounding the inflation projection.

"Underlying inflation, as measured by core inflation, is also expected to moderate in 2018, due to smaller cost pass-through to retail prices compared to the previous year. Inflationary pressures from domestic demand factors will be contained by improving labour productivity and ongoing investments for capacity expansion," BNM said.

According to the central bank, the inflation outlook is subject to two key risks. Externally, BNM said stronger-than-anticipated increase in global oil prices could lead to headline inflation averaging higher. Global oil price movements remain uncertain, subject to geopolitical risks and developments in the US shale oil industry, BNM said.

"Domestically, stronger-than-expected growth in demand could support larger cost pass-through to prices, and risk stronger demand-driven price pressures," it said.