KUALA LUMPUR: Malaysia’s inflation is forecast to average around 4.2% next year, compared with 3.1% in 2014, said Bank of America Merrill Lynch (BoA) in a note yesterday. 

“The broader goods and services tax (GST) exemptions and weaker domestic demand in 2015 suggest a further offsetting impact. We think inflation will climb to a low-4%+ handle,” it said. “Risks are tilted toward the downside, especially if oil prices continue to slip,” it added 

Headline inflation nudged slightly higher, to +3% year-on-year, in November, versus +2.8% in the previous month, mainly driven by higher cigarette prices, following an increase in excise duty. 

Falling oil prices will also cushion the impact of the 6% GST, scheduled to be implemented on April 1, 2015. 

“We think moderating domestic demand and falling global commodity prices — in particular, oil — are helping to keep inflation in check,” said BoA.

Looking ahead, the BoA said it no longer expects Bank Negara Malaysia (BNM) to tighten in 2015, given the expectation of a severe negative shock on the Malaysian economy from lower oil and gas prices next year. 

“We recently cut our 2015 GDP growth forecast to +4.6% (from +5% previously). BNM has also emphasised that inflation pressures are largely coming from the supply side, while demand-side pressures have been weak,” it said. 

This article first appeared in The Edge Financial Daily, on December 19, 2014.