This article first appeared in The Edge Financial Daily on November 21, 2019
KUALA LUMPUR: The country’s Consumer Price Index (CPI), a measure of inflationary pressure, rose only 1.1% year-on-year (y-o-y) in October, which is quite a contrast to the public outcry of escalating cost of living.
The pace is the same as in September, according to the latest data released by the Department of Statistics Malaysia (DOSM).
Given the mild inflationary pressure, economists view that Bank Negara Malaysia (BNM) will have one less factor to worry about should it decides to trim the overnight policy rate (OPR).
CGS-CIMB Research noted that core inflation eased marginally to a five-month low of 1.4%, after rising 1.5% y-o-y in September, reflecting tepid domestic demand and underlying inflation pressures.
“Therefore, inflation is unlikely to be a roadblock should BNM choose to loosen monetary policy to cushion the slowdown in Malaysia’s GDP (gross domestic growth) growth.
“We reaffirm our end-2020 OPR forecast of 2.5%, implying two rate cuts of 25 basis points (bps) each,” the research outfit wrote in a note yesterday.
UOB Malaysia concurs that there is room for BNM to lower the OPR, by reducing 25bps to 2.75% in the first quarter of 2020 — to safeguard domestic growth amid lingering uncertainties brought by the trade tension between China and the US, as well as muted private investments.
UOB Malaysia projected the CPI to climb at a faster pace of 2.5% next year amid possible fuel price revision and upward adjustment in water tariffs nationwide.
For full-year 2019, UOB Malaysia projected inflation at 0.8% — lower than the minister of finance’s forecasts of 0.9% — as it expects inflation to hover around 1.1% to 1.3% for the remaining two months of 2019.
In a statement yesterday, the DOSM said Malaysia’s October CPI was at 122 versus 120.7 in the same month last year, adding that “out of 552 items covered in the basket of goods, 371 items showed a y-o-y increase in October while 150 items declined. Some 51 items remained unchanged.”
The DOSM attributed the increase to the expansion in communication (1.6%), transport (0.2%), food and non-alcoholic beverages (0.1%), health (0.1%), and education (0.1%).
On a monthly basis, the CPI increased by 0.2% to 122.
For January to October 2019, the CPI increased by 0.6% y-o-y as compared to the same period last year.
CGS-CIMB Research said the price pressures remain muted in Malaysia as headline inflation stood steady at 1.1% y-o-y in October, slightly ahead of its and market expectations of gentler growth in the CPI.
“The unexpected divergence from inflation forecasts stemmed from an upturn in the communications price index (+1.5% y-o-y in October versus. -0.1% y-o-y in September), driven by telecommunications services (+1.8% y-o-y vs 0% y-o-y in September),” it said in a note yesterday.
Going forward, CGS-CIMB Research expects fuel inflation to trend higher after November on low base effect and subsidy rollbacks. Hence, it expects the CPI to tick up 1.9% in 2020.
Having said that, the research house said the outlook for inflation remains subdued, given weak domestic demand.
AllianceDBS Research lowered its projection for the full-year inflation to 0.6%, from 0.8% previously, due to weak inflationary pressures in the first half of 2019, coupled with the moderation in economic activities and the government’s ongoing ceiling on RON95 and diesel pump prices.
It expects inflation to rise between 2% and 2.5% in 2020, on the back of normalising inflationary trend due to the low base effect and the removal of the price cap for pump prices.