KUCHING: As Malaysia’s headline inflation improved further from 2.6 per cent year on year in March to 2.1 per cent in April, researchers expect inflation will continue to improve in the coming months as price impacts of the Goods and Services Tax (GST) dissipate.
Affin Hwang Capital Sdn Bhd (AffinHwang Research) saif the improvement in April’s figures partly reflects some normalisation of the price impact from the GST as well as potentially lower imported inflation as the ringgit appreciated against the US dollar during the month.
“The improvement in headline inflation and softer price increases were broad-based, including alcoholic beverages and tobacco, utilities, health, education and restaurants and hotels.
“In the months ahead, we believe inflation will most likely trend within the two to 2.5 per cent range in the second quarter of 2016, especially when the price impact of the GST dissipates,” it said.
“However, potential risks to higher inflation would come from oil prices, which have recently recovered from a low of sub-US$30 per barrel in January 2016 to near US$50 per barrel currently,” it added.
“While this is likely to result in domestic retail petrol prices trending higher, we believe some strengthening of the Ringgit against the US dollar will provide some offset to the hike in prices.”
Inflationary pressure may also build up in the second half of the year, AffinHwang Research said, when the minimum wage is raised from RM900 to RM1,000 effective July 1, 2016, if businesses choose to pass the cost down to consumers.
“Nevertheless, we believe the price impact from these factors will be manageable, and full-year inflation should stay within 2.5 to three per cent in 2016 as compared to the official forecast of 2.5 to 3.5 per cent.:”
At the recent Monetary Policy Council meeting, Bank Negara Malaysia (BNM) maintained its overnight policy rate at 3.25 per cent for the eleventh straight monetary policy meeting since the 25 basis point hike in July 2014.
The MPC statement did not highlight extensively on inflation, which suggests monetary policy is still focused on economic-growth momentum.
On a segmental basis, Kenanga Investment Bank Bhd (Kenanga Research) said tTransport costs are expected to remain stable in May due to no price change for the most popular type of petrol from April.
“For the remainder of the year, transport costs will continue to remain low compared to historical averages. Meanwhile, cost pass-through effect from the April implementation of GST)has become unimportant in 2Q16 and most likely in the subsequent quarters.
“Food price inflation will continue to remain high due to rising global food prices and adverse weather conditions affecting local crops. The Food & Non-Alcoholic Beverages sub-index will likely peak in July coinciding with the Eid festive period but will remain well under the 5.0% YoY high in March.”
Kenanga Research maintained its 2016 average inflation forecast of 2.6 per cent but acknowledge the downside risks of our expectations due to weak demand-pull influences.
“The forecast assumes Brent crude prices to end the year at US$47 a barrel, therefore risk would be skewed to the downside if oil prices fall short of the target,” it explained.
“Though Brent crude is currently just a whiskers’ away from US$50 per barrel, downside risk remains as market and sentiment would likely influence its price direction.
“As inflation concerns takes a back seat and growth is expected to pick up at a gradual pace, we maintain our view that Bank Negara Malaysia will keep the OPR at 3.25 per cent for the remainder of the year.”