Activities in 2017, expected GDP improvements should boost growth

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KUCHING: Analysts envisaged Malaysia’s headline inflation rate to remain manageable in 2017, driven by economic activities and an expected improvement in the country’s gross domestic product (GDP).

In a report, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) said, “We expected inflation to pickup in 2017 on the back of the anticipation of oil to stabilise at higher prices in 2017, averaging at around US$50 per barrel.”

It noted that year-to-date, Brent crude oil prices has averaged at US$43.8 per barrel. It also forecast higher economic activity in 2017 with GDP rising to 4.3 per cent year-on-year (y-o-y) from an estimated 4.1 per cent for 2016, which should give inflation some tailwind.

In a separate note, RHB Research Sdn Bhd (RHB Research) expected the headline inflation rate to remain manageable at 2.5 per cent in 2017, up from two per cent estimated for 2016.

However, it pointed out that there is still room for Bank Negara Malaysia (BNM) to cut the overnight policy rate (OPR) in order to spur further economic growth.

It explained, “Given rising currency volatility associated with Donald Trump’s victory in the US Presidency election, we believe there is a strong likelihood for the Central Bank to be cautious and keep the OPR unchanged at the current level of three per cent in 2017.

“Having  said that, there is room for a further rate cut should growth fall below expectation in 2017 and if the ringgit stabilises at a stronger level.”

Meanwhile, MIDF Research said, BNM has no specific target inflation target unlike the Federal Reserve.

However, it anticipated the central bank to continue taking a pragmatic move and accommodative to domestic growth.

“While we expect world trade to remain subdued, external trade should see higher year-on-year growth in 2017, hence delivering the much needed boost for a higher GDP figure.

“We think domestic consumption will still be under pressure especially as the government continues its consolidation process, targeting fiscal deficit to narrow to three per cent from estimated 3.1 per cent this year.

“Thus, we believe a rate cut will lend the domestic economy the needed support for higher growth,” it added.

Of note, Malaysia’s inflation rate in October edged lower to a three-month low at 1.4 per cent.

“Headline inflation moderated slightly in October to 1.4 per cent from 1.5 per cent in September as food and transportation items saw prices at slower pace.

“In particular, for fresh meat, inflation fell almost by half to 2.4 per cent in the month compared with five per cent in September. Core inflation also moderated during the month from 2.1 per cent to two per cent in October,” MIDF Research said.

It also pointed out that the the hike in RON95 prices for two consecutive months pushed inflation higher as it saw the sub-item fuels & lubricants gained 5.7 per cent month-on-month; thus deflation on y-o-y terms narrows to 11.5 per cent.

“We expect this sub-items to cause deflation to narrow further to 10 per cent, arising from the fuel price hike in November,” the research team added.