Inflation likely to be higher in 2019

KUALA LUMPUR: Malaysia’s inflation is expected to be higher in 2019, providing relief to private investment after an uninspiring 2018.

The research arm of Public Investment Bank Bhd (PublicInvest Research) expects inflation to be higher in 2019, providing relief to private investment after the relatively uninspiring trend in 2018.

It explained that the relatively tame inflation trend in 2018 might not be repeated in 2019 due to the low base effect, the pressure from switching to targeted fuel subsidies, ringgit weakness and the full-year implementation of new indirect tax.

Malaysia’s inflation might also be pressured by the volatility in oil prices due to the advanced economies’ policy movements, it added, while oil price could also head north due to the geopolitical conflicts if any.

“All these will be the basis of a steady rise in inflation to 2.2 per cent in 2019. Despite the one-fold increase in inflation projection, we are not concerned over this in the absence of excessive demand pressure,” it added.

However, it pointed out that it remained concerned on the impact of the change in petrol subsidies on private consumption beginning second quarter (2Q) next year.

It explained: “The group that is eligible for subsidy may be small in number (which are small engine motorcycle and cars), leaving the rest of the population potentially hit by the re-floating measures.

“This may take a toll on private consumption, more so if there is a rise in oil price volatilities.”

Aside from that, it noted that the likely weakness of ringgit may hurt the purses of consumers even further, pushing us to caution on the high possibility of a pullback in private consumption in 2019.

For the remaining days of 2018, Kenanga Investment Bank Bhd’s research team (Kenanga Research) expected inflation to taper off and remain below one per cent as the upward pressure arising from year-end festive demand, weak ringgit and seasonal monsoon period will be offset by fuel subsidies, particularly as RON95 price remains fixed at RM2.20, and the high base effect from the previous year.

“On a year-to-date basis, the CPI has moderated to one per cent compared to 3.8 per cent in the same period a year ago. As such, we expect 2018 CPI growth to hit the lower end of our forecast range of one to 1.5 per cent (3.8 per cent in 2017),” it added.

On the overnight policy rate (OPR) next year, Kenanga Research believed that Bank Negara Malaysia will hold the OPR steady at 3.25 per cent next year to ensure price stability and to support economic growth.

PublicInvest Research said: “We see no reason for OPR to be intervened in 2019 as there is no immediate risk to growth prospects while there are also dim prospects of an overheating economy. Based on that, we reckon that OPR will remain unchanged in 2019.”

As for Malaysia’s Consumer Price Index (CPI) for November 2018, Kenanga Research commented that Malaysia’s headline inflation eased to a three-month low of 0.2 per cent year-on-year (y-o-y) in November (0.6 per cent in October).

It noted that the inflation growth has remained mild since August, in part due to the tax holiday period following the abolishment of the Goods & Services Tax (GST) since June, the reintroduction of the fuel subsidy and the high base effect.

“The lower CPI growth was largely attributed to the increasingly muted impact of the Sales and Services Tax (SST) since its implementation in September. In addition, the higher base effect a year ago mainly in the index of transport and communication had also influenced the CPI growth outcome,” it added.