Mixed on Malaysia’s inflation outlook in July
KUCHING: Analysts are mixed on Malaysia’s headline inflation with some expecting to continue losing steam with the lack of several inflationary pressures, while others expect it to perk up in July.
In a report, the research arm of AmInvestment Bank Bhd ( AmInvestment) believed Malaysia’s headline inflation for the month of July could soften further to 0.6 per cent from the month of June’s reading which was at 0.8 per cent year- on- year ( y- o- y).
It noted that its preliminary estimates appear to be lower than the consensus estimates of 0.9 per cent.
“The lack of inflationary pressure could be attributed to effects from the tax holiday period following the abolishment of the GST, stable fuel pump prices with both RON95 and diesel holding at RM2.20 per litre and RM2.18 per litre respectively due to the fuel subsidy while RON97 fell four sen to RM2.55 per litre, the ringgit gaining 5.6 per cent y- o- y in July while on a m/ m basis, it fell by one per cent compared to June’s 1.7 per cent depreciation, base effect, and lack of demand pull pressure,” the research team added.
Should inflation continue to exhibit a softening trend, AmInvestment believe the fullyear average would reach the research team’s lower end of 0.6 to 0.8 per cent projection instead of its base case forecast of 1.5 per cent for 2018.
“There is much room for us to move our base case to the lower end of our inflation projection. For 2019, we project inflation to hover around 1.5 to 1.8 per cent,” it added.
On the other hand, RAM Rating Services Bhd ( RAM Ratings) expects the headline inflation rate to inch up to 1.0 per cent in July 2018, underpinned by stronger inflationary pressure from the transport fuel component.
In a statement yesterday, the ratings agency said the average price of RON95 petrol rose 12.4 per cent in July compared to 9.9 per cent in June, amid low- base effects.
Moving forward, prices are expected to remain subdued with the zero-rating of the Goods and Service Tax ( GST), limiting any further upside pressure against inflation, while the Sales and Services Tax ( SST) was expected to exert some cost past- through.
“Our initial assessment of the SST and its potential inflationary impact does not indicate any destabilisation of prices or consumption for now.
“This is due to the SST’s smaller share of products in the consumer price index basket and because it applies to manufacturers rather than the end- consumers,” explained RAM’s head of research, Kristina Fong.
Furthermore, any destabilising effects from the SST should be contained by its single layer of taxation, the less restrictive administrative costs of implementation and proposed exemptions on raw materials, components and packaging for registered manufacturers.
In view of the deflationary pressure from the change in the taxation system, coupled with lower fuel prices from the reinstatement of fuel subsidies and a persistently weak growth trajectory for food prices, overall inflation was expected to average 1.3 per cent this year, it said.
“Given the lower core inflation and moderating gross domestic product growth of 4.9 per cent, there seems to be a downward bias for the Overnight Policy Rate ( OPR) this year.
“Nonetheless, the OPR is expected to stay put at 3.25 per cent throughout the rest of 2018 as lingering policy uncertainties and some macro risks may still pose a risk to capital outflows,” it said.
RAM Ratings believed that monetary policy would play a bigger role because fiscal consolidation is perceived as a key trend going forward, hence, less scope for additional pumppriming.
On its outlook on Malaysia’s economy, AmInvestment projected a slower gross domestic product ( GDP) outlook for 2018 around 4.8 to five per cent and 4.2 to 4.5 per cent, a 25bps rate cut on the 3.25 per cent OPR is on its radar with a probability of 25 per cent.
“The low probability for now is because rising global interest rates are putting a lid for a rate cut as it will result to interest rate differential that will not favour us and hence add pressure on the ringgit to weaken. We expect the OPR to stay at 3.25 per cent in 2018,” it added.