Economists are expecting the country’s average inflation to remain in the negative this year, reflecting the low retail fuel prices and the electricity tariff rebate provided by the government.
KUALA LUMPUR (Aug 18): Malaysia’s inflation, as measured by the consumer price index (CPI), declined 1.3% year-on-year (y-o-y) to 119.9 in July — the fifth consecutive month of contraction — led by the decrease in the CPI's transport component.
After first declining by 0.2% y-o-y in March, the index fell 2.9% in April, its sharpest fall since 2010. It fell by 2.9% y-o-y again in May, and by 1.9% in June.
Economists are expecting the country’s average inflation to remain in the negative territory this year, reflecting the low retail fuel prices and the electricity tariff rebate provided by the government.
Affin Hwang Investment Bank Bhd chief economist Alan Tan has revised the forecast for Malaysia’s headline inflation rate to average around -0.3% in 2020, from 0.1% previously, no thanks to some downward pressure in the months ahead, from costs of transport as a result of the continued high base of last year’s retail fuel price of RON95 that was capped at RM2.08 per litre, versus RM1.68 currently.
This is coupled with the ongoing electricity discount from April to December 2020 that will also weigh on headline inflation, going forward.
Bank Negara Malaysia (BNM) has forecast the 2020 CPI to be in the range of between -1.5% and 0.5%.
In the first seven months of 2020, the country’s headline inflation rate averaged -0.9% y-o-y compared with +0.3% in the corresponding period last year.
“Nevertheless, as domestic economic activity continues to slowly recover, we believe rising demand and improvement in global oil prices will put some gradual upward pressure in the later part of 2020,” said Tan.
With BNM having already slashed the overnight policy rate (OPR) by a collective 125 basis points (bps) this year, Tan believes the current level of interest rate is supportive of economic recovery.
Thus, he maintains that the central bank will likely keep OPR unchanged at 1.75% in the next monetary policy committee (MPC) meeting on Sept 10.
With the inflationary pressures remaining muted, MIDF Research is maintaining its projection for consumer prices to register a -0.5% y-o-y decline this year. “The decision by the government to extend the electricity bill discounts until the end of the year will cushion some impact of utilities charges on the consumers,” the research firm said.
Despite Malaysian consumers resuming their spending activities, MIDF said the recovery for spending on non-essential items and the overall domestic expenditures will take time to fully recover, as consumers may hold back their spending plans on concerns over future personal finances and outlook for the job market.
Likewise, MIDF is also of the view that BNM will pause from further easing of the monetary policy, looking at signs of recovery in economic activities after the MCO restrictions have been eased and more business and consumer activities allowed to resume.
UOB Malaysia economists Julia Goh and Loke Siew Ting have however pencilled in one more 25 bps rate cut on Sept 10, bringing the OPR to 1.5% by year-end.
“Another cut in September cannot be ruled out, given official remarks regarding the pace of economic recovery, downside risks to growth, and concerns over the impact on borrowers, when the loan moratorium ends in September,” they said in a note today.
In anticipation that deflation will continue its easing trend over the next few months as the domestic economy recovers and commodity prices stabilise, the UOB economists kept the 2020 full-year CPI projection at -0.5% with volatile global oil prices a wildcard.
“Underlying inflation is also projected to be kept in check and in line with a gradual improvement in domestic demand conditions, amid still high unemployment,” they added.
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Malaysia July 2020 CPI down 1.3% on-year