Moderate wage growth, subsidies limit needed for aggressive hikes

KUCHING: Moderate wage growth and subsidies limit the need for aggressive policy rate hikes, analysts opine.

According to Standard Chartered Bank in its Global Research, with growth recovery expected to extend in the quarters ahead, inflation pressures may remain firm.

“Headline consumer price index (CPI) eased to 4.5 per cent year on year (y-o-y) in September (from 4.7 per cent in August) but this is still a high level,” Standard Chartered Bank said.

“In particular, Malaysia’s inflation is suppressed due to subsidies such as fuel price caps.

“Core inflation, meanwhile, rose to four per cent y-o-y in September, a multi-year high. More importantly, inflation continues to broaden.”

The bank estimated that circa 50 per cent of items in the CPI basket rose more than 2.5 per cent y-o-y in September, a record high.

“The labour market is also tightening. The vacancy to unemployed ratio was circa 1.7 in 3Q (estimated using August unemployment data).

“While the participation rate rose further to 69.7 per cent, this is already a record high.”

Furthermore, Standard Chartered Bank believed that the changes to the subsidy mechanism, in particular to the RON95 price cap, will be made in a very measured and targeted manner.

The bank estimated that if only 20 per cent of RON95 users are targeted, headline CPI may only increase by 1.3 per cent on an annual basis, or half of that if new prices are imposed in 2H-2023.

“In addition, inflation passthrough pressures appear to have eased somewhat. Businesses appear to have passed on some of their cost increases.