This article first appeared in The Edge Financial Daily on September 20, 2018

KUALA LUMPUR: Inflation, as measured by the Consumer Price Index (CPI), receded further to 0.2% year-on-year (y-o-y) in August — the lowest level in 42 months. The pace was lower than the consensus estimate of 0.4%.

The slower pace was mainly due to lower fuel costs. The index for transport increased 2.1% compared with 6.7% in July.

On a monthly basis, the CPI increased 0.2% compared with July 2018. Meanwhile, CPI for the period of January until August registered an increase of 1.3% from a year earlier, the department added.

According to MIDF Research, the moderation of August CPI reflected the absence of the goods and services tax (GST) and driven by large slowdown in transport inflation.

“The inflation rate remained far below 1% y-o-y as it was the last month of the tax holiday period,” said MIDF Research said.

Given record-high supply of crude oil in August, the retail fuel price posted slower growth of 3.7% y-o-y for the month — the lowest in four month, according to MIDF Research.

Amid higher base effects, MIDF Research expects the headline inflation rate to average at 1.3% in 2018 compared with 3.8% in 2017. This is supported by a lower inflation rate for the first eight months which registered 1.3% compared with 3.9% in the same period last year.

Meanwhile, Nomura Global Market Research expects the CPI inflation to rebound to 1.1% y-o-y in September due to the reinstatement of the sales and services tax (SST).

For the full year, it maintains its forecast for CPI inflation of an average 1.2%.

The Japanese-based research outfit expects Bank Negara Malaysia (BNM) to maintain the country’s benchmark interest rate at current level for the rest of 2018.

However, it does not rule out the possibility of a rate cut in 2019.

It anticipates a slowdown in full-year gross domestic product (GDP) growth of 4.7% this year, undershooting BNM’s 5% forecast and implying a slowdown in second half to 4.5% y-o-y from 4.9% in first half, before slipping lower to 4.2% in 2019.

RHB Research expects BNM to keep the overnight policy rate unchanged at 3.25% for the rest of the year and into 2019, as this would help ensure the stability of the ringgit versus the greenback, against the backdrop of ongoing monetary tightening by the US Federal Reserve (Fed).

The research house expects the headline inflation to pick up to 2% in 2019 from an estimate of 1.2% for 2018 as prices readjust after the replacement of GST with SST and also low base effect following a three-month tax holiday that would dampen inflation in 2018.

On the currency front, the research house said the ringgit is expected to remain weak in the coming weeks before settling at RM4.10 against the US dollar by year end.

“On a year-to-date basis, the ringgit has weakened by 2% mainly on the back of a stronger US dollar, as investors flocked to safety amid concerns of a contagion effect on emerging markets following the Turkish lira crisis,” it said.

“While emerging market currencies have experienced greater volatility recently following the Turkish lira crisis, we expect the contagion effect on other emerging market currencies to be somewhat limited and volatility to subside eventually after investors have adjusted to the new expectation on Fed fund rates,” it added.

On the economic front, RHB Research expects Malaysia’s GDP to grow at 5% for 2018 and 2019, slowing from 5.9% growth recorded in 2017.

“Looking ahead, slowing global economic activities will likely weigh on Malaysia’s external demand for its exports while anticipated austerity measures on the public sector will drag on domestic growth,” it said.

“We, however, see increasing downside risk to our GDP forecast for 2019, due to the trade war effects and review of policies by the government. We are keeping our forecast for 2019 unchanged at this juncture while waiting for a clearer picture on the trade war,” it said.