PETALING JAYA: The country’s inflation rate is expected to be stable for the remainder of the year, amid various government initiatives to limit upward price pressures.

TA Research in a report said the inflation rate over the next few months is expected to stay within the long-term average of 2% year-on-year (y-o-y), provided there are no adjustments to fuel prices, particularly for RON95.

“However, if fuel prices rise, with the government potentially increasing the ceiling price by 40 sen, we anticipate an impact on fuel-related sectors such as food and beverages and restaurant and accommodation services.

“This could drive monthly consumer price index (CPI) changes above the 3% level, with ripple effects extending across the economy.”

If the petrol subsidy rationalisation is indeed off the table or comes later than expected, TA Research said the CPI projection may be lower, potentially falling within a range of 2.5% to 3% y-o-y.

“Hence, we may see inflation averaging 2.6% y-o-y in the second half of the year, higher than the first half of 2024’s (1H24) reading of 1.8% y-o-y. A low base effect will partly play some role as the CPI rose by only 1.8% y-o-y in 2H23.”

The research house noted that Bank Negara has forecast a headline inflation rate of 2% to 3.5% y-o-y in 2024, with core inflation at 2% to 3% y-o-y.

“While the CPI increase may temporarily impact the overall economy, we believe this effect will be short-lived as conditions stabilise.

“Government efforts such as raising public sector wages, potentially increasing the minimum wage (to be reviewed soon), providing cash assistance and monitoring price levels in Malaysia will help sustain the economy.”

Additionally, the research house said narrowing the fiscal deficit will be a key priority, which should improve market sentiment.

“Consequently, fuel subsidy reform remains essential, alongside a broader review of various subsidies to ensure that funds are better targeted at disadvantaged groups in the society and towards revenue generating measures.”

Malaysia’s inflation grew 2% y-o-y in July, representing the same rate of growth from the previous month, according to the Statistics Department.

By sector, the rise in consumer costs was led by restaurant and accommodation services, which increased 3.4% in July as compared to 3.3% in June.

Inflation for personal care, social protection and miscellaneous goods and services increased 3.2% in July, as against 2.8% in June.

Meanwhile, the food and beverages group recorded an increase of 1.6% in July, down from 2% in June, due to slower increases of 0.3% for the food-at-home and 3.2% for the food-away-from-home subgroups.

The statistics agency also said the overall monthly inflation in July rose by 0.1%, slowing from 0.2% in June.

Kenanga Research, meanwhile, is maintaining its 2024 headline CPI forecast at 2.2%, reflecting limited upward pressure on prices.

“While inflation is expected to rise in the coming months, this is largely due to base effects.

“Pressures are anticipated from the pass-through effects of diesel subsidy rationalisation, increased consumer spending following the withdrawal of the Employees Provident Fund’s flexible account and higher costs of imported goods driven by geopolitical and climate crises.”

However, the research house said these are likely to be tempered by the ongoing strengthening of the ringgit.

“To highlight, the introduction of the progressive wage policy in October, alongside a planned civil servant salary increase in December, could push inflation higher in 1H25.”

Separately, Kenanga Research said it expects Bank Negara to keep the overnight policy rate (OPR) at 3% for the next 12 to 15 months, given the limited upside risk to inflation in the near term.

“While inflation may spike in 2H25, potentially due to the floating of RON95 in July next year, this could be offset by weaker external demand, allowing Bank Negara to hold rates steady.”

CGS International (CGSI) Research also expects Bank Negara to maintain the OPR at 3% at the upcoming Monetary Policy Committee (MPC) meeting next month.

“Despite the potential inflation upside ahead, we think it is still too early for Bank Negara to turn hawkish.

“We think the central bank is awaiting clarity with respect to the implementation of the RON95 price revision before determining the direction of monetary policy.

“Hence, we expect the central bank to keep the OPR at its next MPC meeting during Sept 4 to 5. We reiterate our end-2024 OPR forecast of 3%.”

https://www.thestar.com.my/business/business-news/2024/08/26/inflation-forecast-to-be-stable-for-rest-of-2024