This article first appeared in The Edge Financial Daily on January 25, 2019

KUALA LUMPUR: Bank Negara Malaysia (BNM) maintained the overnight policy rate (OPR) at 3.25% yesterday amid a dip in headline inflation to a nine-year low of 1% in 2018.

Economists project inflation to trend slightly higher in 2019, with crude oil prices being the swing factor, but expect the central bank to keep the key lending rate unchanged this year as inflation growth remains manageable.

Following its monetary policy commitee (MPC) meeting, the central bank also cautioned that “global growth momentum is moderating with trade tensions beginning to have a material impact on global trade and investments.”

But its statement also said the latest indicators point towards sustained economic expansion in Malaysia, with domestic demand remaining the key driver of growth for 2019.

Socio-Economic Research Centre executive director Lee Heng Guie expects inflation to rise slightly from 1% to 1.5% in 2019.

“I concur with BNM’s latest MPC statement which said that inflation is expected to average moderately higher this year. Of course, the wildcard will be the oil price trajectory with petrol prices being subject to a weekly float and the targeted petrol subsidy scheme expected to be rolled out [this year].

“The higher exemption of goods under the sales and service tax regime compared to that of the goods and services tax (GST) is also a contributing factor [to moderate headline inflation], as well as the absence of demand pressures,” he told The Edge Financial Daily.

In December, the consumer price index (CPI) rose by 0.2% year-on-year to 121.1 compared to 120.9 in December 2017 on the back of increases in housing, water, electricity, gas and other fuels (up 2%), restaurants and hotels (1.3%), alcoholic beverages and tobacco (1.1%), education (1.1%) and food and non alcoholic beverages (0.7%), the Department of Statistics Malaysia said.

Following the abolishment of the GST in June last year, the rate of inflation had been benign, growing at below 1%.

AffinHwang Capital chief economist Alan Tan agrees higher crude oil prices could nudge the CPI higher.

“We see this happening towards the second half of 2019. For the full year we are expecting inflation to average at about 2%. We believe that the direction of Malaysia’s inflation will be influenced by global oil prices, which we believe will trend gradually higher,” he told The Edge Financial Daily.

MIDF Research’s headline inflation forecast is slightly higher, averaging 2.2% in 2019.

“We anticipate inflationary pressures mainly from fuel-related items to increase, consistent with our expectation on crude oil prices to average at US$75 per barrel for 2019," the firm said in a report.

No reason for OPR hike in 2019

MIDF Research noted that since the core inflation rate is expected to remain steady in 2019, a change in monetary policy is not required at this juncture.

“As core inflation rate remains low, we opine change in monetary stance is not required at this juncture as it would affect the trajectory of domestic growth. Furthermore, the US has indicated that their interest rate is nearing the neutral rate, suggesting that the central bank is preparing to slow down its normalisation exercise.

“Since there will be less pressure from both domestic and external fronts, we anticipate that BNM will maintain the OPR at 3.25% in 2019 barring any surprises in domestic economic growth,” the firm said.

UOB Malaysia senior economist Julia Goh also expects BNM to keep the OPR unchanged.

“A slower path of Federal Reserve System's (Fed) rate hikes and manageable domestic inflation expectations provide some breathing room for BNM to keep rates on hold this year. We maintain our view for the OPR to stay unchanged at 3.25% throughout the first half of 2019

“We expect two more US Fed rate hikes this year. The ringgit is expected to remain on a weakening bias in line with moderate US dollar strength. From a technical perspective, the ringgit is likely to trade between 4.09 and 4.15 against the US dollar in the immediate term," Goh said.