Malaysia’s inflation may exceed 5% in March

> Will remain somewhat elevated from fuel-related factors, says research house

PETALING JAYA: Malaysia’s inflation could exceed 5% in March on the back of the low base effect following a 4.5% growth in February, said Kenanga Research.

“With the mild increase in fuel prices during March (no change in RON95 and RON97 prices but a 5 sen/litre increase for diesel prices), we expect inflation to remain somewhat elevated from fuel-related factors,” it said in a research note yesterday.

Kenanga Research has revised its Q1 inflation projection to 4.4% from its previous estimate of 4.1% as inflation moved higher than the base-case forecast.

Despite that, Finance Minister II Datuk Seri Johari Abdul Ghani has alleviated market concerns over the spike in inflation, saying it was due to the cost of petrol.

“If you look at February last year, RON95 was only RM1.75 and here it is already RM2.30. That is the major part of the contribution,” he told reporters on the sidelines of the Global Offset and Countertrade Association Asia Pacific Conference 2017 yesterday.

“If you look at transport cost, in the basket of CPI, that represents almost 13-14%. When you have that factor, the petrol price goes up from US$30 (RM132) to US$55 (RM242), definitely there is an impact,” he added.

With oil price coming down, Johari said inflation would ease a little.

“Nevertheless, we also need to manage this inflation. There are certain things we can control. The most important thing we need to manage is the basic core inflation items. But something that is related to external factors like oil price is beyond us,” he said.

Kenanga Research expects Brent oil prices to continue trading within US$50 to US$55 per barrel, which will result in sustained high inflation in the transport sub-index on passthrough effects.

However, it foresees a modest stabilisation in oil prices with implementation of the weekly ceiling price mechanism for fuel prices effective tomorrow.

Hong Leong Investment Bank Research, which anticipates an acceleration in March inflation before moderating thereafter to reach full-year forecast of 3.4% year-on-year, expects demand-driven inflation to be contained as economic indicators suggest a moderate recovery.

“In addition, the new Price Control And Anti-Profiteering Act 2016 will also limit the second-round impact,” it said.

Meanwhile, Affin Hwang Capital expects inflation to average around 4% to 4.2% in the first half, before trending lower to 3% to 3.2% in the second half. Average full-year inflation is projected at 3.5%, higher than the earlier forecast of 2.7%.

Despite higher inflation, economists opine that Bank Negara’s monetary policy stance is unlikely to change as the inflation level remains manageable.

Kenanga Research said changes will only be made if there is a significant upward shift in the broader price trend (which will prompt an overnight policy rate or OPR hike) or deterioration to growth (which will prompt an OPR cut).

“Furthermore, we do not believe that the cost-push driven inflationary trend will result in a sharp change in (Bank Negara’s) monetary policy stance with the OPR projected to remain at 3.00%, at least for the first half,” it added.