This article first appeared in The Edge Financial Daily on May 23, 2018

KUALA LUMPUR: RAM Rating Services Bhd expects Malaysia’s headline inflation rate to rise to 1.5% in April 2018, compared with 1.3% in March, mainly due to a reduction in the negative growth contribution of retail fuel.

It noted the average price of RON95 fuel fell only 0.3% year-on-year (y-o-y) in April, compared with a 4.4% y-o-y decline in March.

Additionally, RAM expects the headline inflation to come in at 2.3% in 2018 compared with 3.7% in 2017. “The new administration’s move to zero-rate the goods and services tax (GST) effective June 1 and its proposed intention to maintain the retail fuel price at its current level pose a downside risk to RAM’s 2.3% headline inflation projection in 2018,” the rating agency said in a statement yesterday.

“These two policies alone [assuming there are no changes throughout the second half of 2018] are conservatively estimated to reduce headline inflation by 0.7 percentage point,” it added.

“That said, the downward pressure could ease with future policy refinements, potentially towards a more targeted fuel subsidy, and depending on the scope of proposed changes to the tax system as promised in the ruling Pakatan Harapan coalition’s [14th general] election manifesto,” said RAM head of research Kristina Fong.

On the flip side, Fong said there may also be an upside risk from marginal demand-pull inflation, given a number of the government’s election promises are very supportive of private consumption.

“Bank Negara Malaysia (BNM) had maintained the overnight policy rate (OPR) at 3.25% at its last Monetary Policy Committee meeting, but there remain some uncertainties over the GDP (gross domestic product) and inflation outlook, pending the unveiling of other new policies,” RAM said.

The rating agency said it will monitor developments in the policy direction of the new administration and its advisers in the crucial first 100 days. “We maintain our view that there will [be] no further movement in the OPR for now and expect BNM’s future actions to be data-dependent,” it added.

The Consumer Price Index, measuring inflation, will be released by the Department of Statistics today.