KUALA LUMPUR (July 16): Malaysia’s headline inflation rate is expected to inch up to 1.9% in June from 1.8% in May, despite the zero-rating of goods and services tax (GST) in June, said RAM Rating Services Bhd.

While the imposition of the zero rating is conservatively estimated to have brought headline inflation down 0.4 percentage points, the rating agency noted it was overshadowed by a larger increase in transport fuel inflation.

"The average price of RON95 fuel ascended 9.9% in June from 5.1% in May, driven by significant low-base effects; prices had averaged RM2 per litre in June 2017, compared with RM2.09 in May 2017. The price of RON95 is expected to stay unchanged at RM2.20 per litre, amid the reinstatement of subsidies, until a more targeted system is introduced.

"Given that average prices had declined to RM1.96 per litre in July 2017, the stronger low-base effect is envisaged to again intensify the component’s inflationary pressure in July 2018," RAM head of research Kristina Fong said in a report today.

For the full year, overall inflation is envisaged to average 1.5% on the back of reinstated fuel subsidies, lower prices after the zero-rating of the GST and a persistently weak growth trajectory for food prices.
 
Nevertheless, Fong pointed out uncertainties remain over the impact of reinstatement of the sales and services tax (SST), with respect to the rate and product and business coverage of this tax system.

"We will closely monitor the developments on the imminent SST regime as and when details become available, to assess its eventual impact on the full-year inflation rate for 2018," she added.

"While some uncertainties remain over the country’s gross domestic product and inflation outlook, pending the unveiling of other new policies, both indicators are expected to moderate in 2018, after having rebounded last year," Fong said.

"As such, we maintain our view that there will be no further movement in the overnight policy rate for now and expect Bank Negara Malaysia’s future actions to be data-dependent.

"In particular, RAM will keep abreast of developments in the policy direction of the new administration, as well as the potential repercussions from the ongoing trade tensions between China and the US, which may change Malaysia’s growth and inflation trajectory," she noted.