Inflation momentum to rebound as early as 2Q24 — Analysts
KUCHING: Malaysia’s inflation rate will likely rise again within the first half of the year following the implementation of several tax measures and price adjustments.
“We expect the inflation momentum to rebound as early as 2Q24, following the implementation of several tax measures and price adjustments.
“Various fiscal consolidation measures, such as adjustments in fuel prices, utilities tariffs, and the revision in services tax, could inject upside risks on Malaysia’s inflation momentum. We believe that the fuel subsidy rationalisation and the revision in services tax will inject a material impact on the inflationary trajectory,” said economists at RHB Bank Bhd (RHB Bank).
Meanwhile, it noted that there is limited direct impact from adjustment in water and electricity tariffs as the adjustment quantum is relatively mild and the aforementioned components have a relatively low share in the CPI basket.
“Following more policy developments and greater clarity in associated details, we have revisited our inflation forecasts range.
“Thus, according to our estimates, the said policy measures will lift headline inflation by 0.7 to 1.1 per cent. This would push the inflation range from 3.2 to 3.6 per cent versus 2023’s average of 2.5 per cent y-o-y,” it added.
In the immediate term, it perceived that upside risks in commodity prices buoyed by the higher demand amid reacceleration in global activities coupled with the risks of supply congestions.
“Should the phased fuel subsidy rationalisation be implemented later in the year, the higher crude oil prices could potentially translate into higher retail prices in the local market.
“While pending further announcement from the officials, the price adjustments of fuel could be made in a few ways; setting a higher ceiling price for both RON95 and diesel versus the current ceiling price or adopting the managed float system where the price of fuel is determined based on the Automatic Pricing Mechanism (APM), reflecting the change in market prices.
“Currently, the price for RON97 fuel is floated according to the market prices. Upside revision in fuel prices could be complemented with the provision of targeted subsidies or social assistance to the targeted group to mitigate the inflationary impact,” it explained.
As for the revision in services tax (from the current six per cent to the new rate of eight per cent), it is anticipated to be implemented by March 1, which covers all the taxable services except for food and beverages, parking services and telecommunication.
“Besides that, the proposed expansion of the scope of services tax would cover new taxable services such as karaoke centres, brokerage and underwriting services, and logistics.
“A business-to-business (B2B) exemption would also be given to logistics service providers. Regarding the revision in services tax, we assume an upside increase in headline CPI by between 0.3 to 0.6 per cent,” it noted.
“All the aforementioned policy measures would have potential direct upsides to headline inflation by 0.7 to 1.1 per cent.
“This would push the inflation range for 2024 to 3.2 to 3.6 per cent versus 2023’s average of 2.5 per cent y-o-y. We maintain our 2024 headline and core inflation projections at 3.3 per cent y-oy and 3.6 per cent y-o-y, with balance of risks tilted to the upside,” RHB Bank said.