KUCHING: Economists expect the short-term inflation rate to remain above the three per cent mark for the rest of the year, taking into account further subsidy rationalisation exercise.
According to AllianceDBS Research Sdn Bhd economist Manokaran Mottain, the firm’s inflation target remained unchanged at 3.5 per cent in 2014, given the government’s commitment to further rationalise subsidy policies.
“This is done either through the trimming of fuel subsidies or via a new mechanism of tiered subsidy provision. If the policy materialises, consumer prices might likely pick up again,” he said in a research note yesterday.
Malaysia’s Consumer Price Index (CPI) expanded at a slower rate of 3.2 per cent year on year (y-o-y) in July, down from 3.3 per cent in June – suggesting a moderating trend of consumer prices from recent highs.
Meanwhile, core inflation remained steady at 3.2 per cent, suggesting sustained high non-food prices.
On a cumulative basis, the research house observed that inflation was 3.3 per cent in the first seven months of the year. The inflation rate in July was lower than the Bloomberg consensus as well as the house view.
“The moderating inflation rate in July indicates signs of easing prices and also the tapering of high base effect. For the first half of the year, the average inflation was 3.4 per cent.
“The elevated prices were on the back of the fuel subsidy rationalisation in September 2013 and power tariff hikes in January and May. The full implementation of minimum wages in January 2014 had also translated into higher labour cost for producers,” opined Manokaran.
“With lower inflation, real interest rates has rebounded to a marginal positive territory during the month – for the first time since November 2013. Current Overnight Policy Rate (OPR) stands at 3.25 per cent, effective July.”
Although moderating, short-term inflation outlook is still on the upside, especially given the government’s commitment for further subsidy rationalisation policies either through the trimming of fuel subsidies or via a new mechanism of tiered subsidy provision. If the policy materialises, consumer prices may likely pick up again.
“In this regard, our inflation target remains unchanged at 3.5 per cent in 2014, a level that remains fairly manageable.
Meanwhile, RHB Research Institute Sdn Bhd economists Peck Boon Soon and Shafizal Shafaai said inflation would likely come in at the low-end of its forecast of an average rate of 3.0 per cent to 3.4 per cent in 2014, compared with 2.1 per cent last year.
“For fear of exerting further pressure on inflation, the government is considering introducing a targeted fuel subsidy scheme instead of cutting fuel subsidy directly,” they said in a separate note.
However, inflation would likely accelerate in 2015, when the 6.0 per cent Goods and Services Tax is implemented in April, they said.
Meanwhile, Maybank Investment Bank Bhd maintained its CPI forecast for 2014 at 3.5 per cent for now until further clarity on the way forward on subsidy rationalisation program but tweaked its forecast for inflation in 2015 to four to 4.5 per cent range on continued government’s fiscal consolidation via subsidy rollback and GST introduction which will impact prices of goods and services.
“Nevertheless, the impact is expected to be temporary only to stabilise in 2016,” it said. “We continue to expect a review of the fuel subsidy mechanism probably by end-2014, if not early-2015.”