KUALA LUMPUR (July 6): Malaysia’s headline inflation has remained manageable so far in 2022, primarily helped by government subsidies. It averaged 2.4% year-on-year (y-o-y) from Jan-May. Inflation is, however, set to catch up to regional peers, amid signs of rising and broadening price pressures.

We are raising our 2022 and 2023 average headline inflation forecasts to 3.0% and 2.5%, respectively (from 2.5% and 2.0% previously).

First, food price inflation has surged to its highest level since 2011. The increase in price caps for selected items such as chicken from July is likely to fan further upside pressures.

Second, low base effects driven by discounts implemented on electricity bills from Jul-Sep 2021 is set to push inflation higher in the third quarter of 2022 (3Q22). Lastly, core inflation, already on an uptrend, would inch higher amid an improving economy.

Rising wage growth and minimum wage hikes might stoke additional upside pressures. Risks are tilted to the upside, especially given uncertainty on fuel subsidy rationalisation.

Bank Negara Malaysia (BNM), comforted by the growth recovery, began its overnight policy rate (OPR) normalisation during its May meeting with a 25bps hike to 2.00%. BNM continues to see monetary policy as accommodative for the economy. We think that it is likely to follow through with more tightening in the second half of 2022 (2H22) to reduce the amount of accommodation, given improving growth and likely increased vigilance on inflation.

BNM may consider front-loading rate hikes. Our updated forecasts see end-2022 OPR at 2.50% (vs 2.25%), with upside risks. The ‘measured and gradual’ guidance in May points to a high likelihood of 25bps increments in each decision.

Unless BNM sees signs of disanchoring of inflation expectations, 50bps hike per meeting would be a high bar.