RAM sees headline inflation rising to 2.7% next year

KUALA LUMPUR: Malaysia’s 2019 headline inflation is projected to rise to 2.7%, mainly driven by additional pressure from the switch to targeted fuel subsidies, continued spillover effects from the reintroduction of the Sales and Service Tax and low-base effects during the three-month zero-rated Goods and Services Tax period.

RAM Rating Services Bhd said the inflation projection for 2019 would still depend on the implementation of the targeted fuel-subsidy mechanism in the second quarter next year as key details of its implementation, such as the disbursement mechanism, were still scant. The credit rating agency said another key risk to its forecast was the volatility of global crude oil prices as the pace of inflation in 2019 would largely depend on how effective the Organisation of the Petroleum Exporting Countries-led supply cuts would be vis-a-vis supporting global crude oil prices.

“Based on our estimates, every US$5 move in the average price of Brent crude will alter headline inflation by approximately 0.3 percentage points in 2019, barring any second-round effects on prices,” said RAM Ratings head of research Kristina Fong in a statement yesterday.

RAM Ratings said it expected Bank Negara to maintain the overnight policy rate at 3.25% in 2019, given the need to balance between capital outflow pressures and growth support.

“Although headline inflation is envisaged to accelerate next year, the pace of increase will still be rather nondescript as a trigger point, relative to the downside risks to growth from ongoing fiscal consolidation, volatile capital markets, US-China trade tensions and Brexit uncertainties,” added Fong.

Meanwhile, RAM Ratings said Malaysia’s headline inflation rate eased to 0.3% in November, from 0.6% in the preceding month underpinned by dissipating low-base effects on retail fuel prices.

“The price of RON95 petrol fell 4.5% year-on-year in November as opposed to a 1.1% increase in October.

“On account of low food inflation and the deflationary pressure from the reinstatement of fuel subsidies through the rest of 2018, overall inflation is anticipated to average 1% in 2018, against 3.7% in 2017,” it added. — Bernama