Headline inflation to average between 2.0-3.5 pct

LUMPUR: Headline inflation is expected to remain moderate this year, averaging between 2.0 and 3.5 per cent, largely reflecting potential upside from domestic subsidy rationalisation, said Bank Negara Malaysia (BNM).

Meanwhile, core inflation is expected to average between 2.0 to 3.0 per cent, the central bank said in its Economic and Monetary Review 2023 Report.

“The outlook for inflation remains highly subject to upside risks from both domestic policy factors and external forces.

“Domestically, the potential price adjustments to essential items would induce higher prices on the affected item, particularly those related to energy and food,” it said.

BNM said the inflation outlook hinges on the potential adjustment to the blanket fuel subsidies.

“Given the sizeable share of fuel in the Consumer Price Index (CPI) basket, fuel price adjustments would directly lead to an increase in headline inflation.

“This direct impact from a one-off fuel price adjustment on headline inflation will likely dissipate within one year as base effects diminish,” the central bank said.

However, BNM noted that the extent of upside risks would depend on the knockon effects of the policy adjustment, where firms raise prices to cover increases in costs, leading to broader price pressures on other goods.

Additionally, wage-price dynamics can also pose a tail risk to inflation, although the risk of such second-round effects is assessed to be small in Malaysia as wage increases are aligned with productivity growth, it added.

Nonetheless, BNM said the short-term impact of fuel subsidy rationalisation on inflation and growth would also depend on the size and timing of the price adjustments.

Additionally, the scope of targeted assistance accompanying the rationalisation of subsidies is also important, as it would mitigate the impact from higher costs on vulnerable populations amid the transition.

Meanwhile, the central bank said domestic monetary and financial conditions are expected to remain conducive to financial intermediation activities, providing support for economic growth.