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

KUALA LUMPUR: Malaysia’s headline inflation, as measured by the Consumer Price Index (CPI), accelerated to a 13-month high in June, owing to a low base effect because of the removal of the goods and services tax (GST) in June last year.

The CPI’s 1.5% climb in June was significantly higher than the 0.2% year-on-year (y-o-y) rise in May, and marked the index’s fastest pace since May 2018, when it rose 1.8%.

However, economists do not expect full-year inflation to exceed 1% as the low base effect will continue to end-August. Moreover the government is expected to take steps to keep prices in check.

June inflation was in line with the median forecast in a Reuters poll of 1.6%, and Bloomberg’s 1.5%.

In a statement yesterday, the Department of Statistics attributed the CPI growth for June to the abolishment of the GST to zero-rated on June 1, 2018.

This resulted in an increase in the main groups contained in the CPI, namely furnishings, household equipment and routine household maintenance (+3.1%), recreation services and culture (+2.7%), food and non-alcoholic beverages (+2.3%) and housing, water, electricity, gas and other fuels (+2.3%).

UOB Malaysia, in a note yesterday, attributed the low base effects following the zerorisation of the GST from June 2018 as “the main reason for last month’s inflation uptick.”

Notwithstanding the slight spike in inflation, the research house has revised downwards its forecast CPI for the year at 0.8% from 1.5% previously as it expects Putrajaya to put in place new measures to contain rising costs.

“The ongoing initiatives implemented by the National Action Council on the cost of living and the continuation of favourable low base effects into August are expected to help keep the nation’s inflation rate low,” said UOB Malaysia.

RHB Research, which had projected June inflation at 1.3%, said in a note yesterday: “Following June’s spike, the year-to-date headline inflation rate has moved into positive territory at 0.2% y-o-y for first half 2019 (1H19), while year-to-date core inflation inched higher to 0.6% y-o-y, but remains fairly manageable.” It is maintaining its forecast inflation at 0.9% for 2019.

Because of the low base effect, headline inflation is expected to remain high in the coming months before waning from September onwards owing to the implementation of the sales and services tax during the corresponding period last year, RHB Research observed.

“A possible refloating of the RON95 fuel price — upon implementation of the targeted fuel subsidy — could also exert upward pressure on inflation,” it added.

It does not expect Bank Negara Malaysia (BNM) to implement further rate cuts to the overnight policy rate (OPR) for the remainder of 2019.

That said, RHB Research cautioned the worsening global trade outlook will weigh on Malaysia’s external trade and dampen economic growth next year, and increase the downside risks on interest rates.

“Consequently, we do not rule out BNM lowering interest rates by another 25bps (basis points) to 2.75%, bringing the policy rate to its lowest in nine years.”

UOB Malaysia also expects the OPR to be maintained at 3%, but pending the development of ongoing trade talks between the US and China, monetary rate decisions by the US Federal Open Market Committee and Malaysia’s upcoming Budget 2020 in October.

In May 7, BNM cut its benchmark interest rate for the first time in nearly three years. The rate was last cut by 25bps to 3% in July 2016, but was bumped back to 3.25% in January 2018.