KUALA LUMPUR (June 30): Headline inflation, as measured by the consumer price index (CPI), is expected to rise above 4% following imposition of the Goods & Services Tax (GST) in April next year, according to the Malaysian Rating Corporation Bhd (MARC).

However, based on the experience of other countries, inflation would likely normalise within two years of GST's introduction, it said in a report entitled "2H2014 Economic Outlook: External Positives Amidst Domestic Challenges".

The report also sees Malaysia's economic growth picking up to 5.3% this year from 4.7% last year, following a rebound in external trade performance and sustained growth in private investments as well as private consumption.

“We anticipate the initial increase of CPI to above 4% simply because inflation has been on a rising trend to start with, amidst the government’s ongoing subsidy rationalisation measures,” said MARC’s Chief Economist Nor Zahidi Alias.

“On the whole, we foresee inflation to average around 3.5% this year before edging up to 4.4% next year.”

Nevertheless, Nor Zahidi said the impact of GST on inflation would likely fade in the first two years after implementation based on the experience of other countries, namely Singapore, Australia and China.

The chief economist opined the expected build-up in inflationary pressures will prompt Bank Negara Malaysia to adjust its monetary accommodation stance to be ‘ahead of the curve’ and avert stronger-than-expected headline CPI numbers in the near term.

He maintained his view that the overnight policy rate would likely nudged up by 25 basis points this year.

“Going forward, we think inflationary issues will capture the attention of both the man on the street and the authorities, as the latter manoeuvres policies to deal with internal and external sources of inflation,” Nor Zahidi said.

He pointed out the elevated global crude oil prices in the wake of rising geopolitical risks in Iraq might induce the government to further rationalise its petrol subsidies.

He also highlighted the Food and Agriculture Organisation's Food Price Index, which leads Malaysia’s inflation gauges, has rebounded since hitting its trough in December 2012, keeping Malaysia’s food index and headline CPI growth higher than in the preceding year.