KUALA LUMPUR (Jan 25): Economists are expecting the consumer price index (CPI) to average between 3% and 3.5% in 2023, compared with 3.3% in the previous year.

As a result, Bank Negara Malaysia (BNM) may have to raise the overnight policy rate to 3% in order to tackle inflationary pressures due to a decrease in economic activity.

In 2022, the nation's headline inflation rate rose to 3.3% on a year-on-year basis compared to 2.5% in the preceding year, due to the increase in food and transport prices, which are a consequence of the tensions between Russia and Ukraine, as well as the escalating prices of commodities around the world. 

CGS-CIMB said while headline inflation has shown signs of moderation due to the diminishing low base effect and falling commodity prices, the government intervention in administered items would still continue in the near term. 

“We expect inflation to taper down on a y-o-y basis but to remain elevated in the short to medium term given some persistent price pressures,” it said. 

According to the research house, the electricity subsidy revision in January 2023 for non-domestic and non-small and medium enterprises (low voltage) users might lead to some increase in headline inflation. 

However, the impact would be minimal given its limited contribution to the CPI basket, it said, noting the recent price movement has been driven primarily by cost-push factors as opposed to demand-pull amid a more rigid labour market domestically, with limited wage bargaining and weak unionisation.

Meanwhile, Hong Leong Investment Bank (HLIB) expects CPI to continue its downtrend to settle at 3.1% this year. 

” Nevertheless, risks to inflation remain tilted to the upside, stemming from a potential subsidy adjustment scheme sometime this year, as well as the impact of China’s reopening on global commodity prices.  

“Should these risks materialise, we think BNM may increase OPR by another 25 basis points (bps),” it said adding that OPR to be at 3.0% this year. 

Separately, Public Investment Bank expects inflationary pressure might trend lower in the first quarter of 2023 due to a more stable inflation of non-food items in tandem with guidance given by BNM in their January Monetary Policy Committee meeting. BNM has paused the OPR at 2.75% on January 19, bucking the consensus estimate of a 25bps increase.

“We are expecting the country’s headline inflation to average within the range of 3.0% and 3.5% this year, subject to changes in domestic policy measures such as the possible introduction of a targeted fuel subsidy and price controls. 

“Therefore, we anticipate a comprehensive clarification of the timeline and strategies for the deployment of targeted subsidies to support the B40 and M40 income groups and small businesses that have been severely impacted by recent price escalations, which we expect will be mentioned in the forthcoming Budget 2023 announcement in February,” it added. 

Public Investment Bank expects BNM would keep the OPR unchanged at 2.75% at the March and May MPC meetings. 

It assumed the central bank would increase the key rate with another 25 bps to 3% per cent in the second half of the year, but this hinges on domestic policy measures.