KUALA LUMPUR (June 8): Inflation in the country is expected to remain high for at least until the third or fourth quarter of the year before tapering off, says UOB Asset Management Malaysia chief executive officer Lim Suet Ling.

“The scenario has changed now in the sense that inflation becomes stickier. Previously, we were thinking that it is just a short term kind of supply shock and you can get it over once the productions start again,"  she said during a panel session at the Maybank Invest Asean 2022 conference on Wednesday (June 8).

Lim said the situation was more positive at the beginning of this year as Malaysia and other countries were coming out of the lockdown.

“We saw the supply chain bottleneck but at the same time, we could see demand rising back and production coming back. Hence, our thinking at that time was it could be a mid-cycle expansion and economic growth can continue to move for a couple of years more,” she said.

However, the Ukraine war resulted in commodity prices shooting up, along with oil and food prices. China, meanwhile, continued to see a lockdown for a couple of months, and again the supply chain got affected, said Lim.

“Because of various reasons globally like the China-US tension, the stickiness of inflation is there and we can see it flowing over to wages and rental. Once it flows into wages, it’s going to be there and it's very unlikely that wages would be cut," she said.

“In this case, when we relook at the market, and set going through the slowing down in terms of raising interest rates, what we are advising our investors is to be defensive and stay cautious for the time being,” Lim added.  

Gerald Ambrose, the CEO of abrdn Islamic Malaysia Sdn Bhd, concurred with Lim and added that investors have to look at a different way in terms of asset allocation given that inflation is set to be “sticky”.  

“We still believe that it’s very difficult to have asset allocation when everything is going down. And this happens at the start of the year with bonds and equities apart from residential properties in a lot of developed markets.

“We keep a neutral weight between equities, bonds but slightly overweight on real estate,” he said.  

Ambrose also opined that Malaysia does not have a serious problem with inflation as there is a recovery in demand despite the higher prices.

“I think we can edge up interest rates in a gradual way and retain economic health. I'm not saying domestic demand is great, but it seems to be recovering now that we have opened up.

“We’ve also benefited from higher commodity prices. The key thing is to make sure the ordinary Malaysians do well and that would be done perhaps by a gradual increase in interest rates,” he said.

Malaysia's inflation, as measured by the consumer price index (CPI), increased 2.3% in April 2022 from a year earlier, led by higher food prices, according to the Department of Statistics Malaysia last month.

The increase in food inflation, which contributed the highest weightage to the overall weight of the CPI, remained to be a major contributor to inflation. Inflation for this group increased 4.1% year-on-year in April.

Meanwhile Bank Negara Malaysia (BNM) had increased the overnight policy rate (OPR) by 25 basis points to 2% from a record low of 1.75% as global inflationary pressures have increased sharply and after taking into account that the sustained reopening of global economy and improvement in labour markets continue to support the recovery of economic activity from the impact of Covid-19-driven movement restrictions.

The OPR had been maintained at 1.75% since July 7, 2020, when BNM cut the rate from 2% following the Covid-19 outbreak which began in early 2020.

BNM, meanwhile, has projected Malaysia's headline inflation to average between 2.2% and 3.2% in 2022.

Given the improvement in economic activity amid lingering cost pressures, the country's underlying inflation is expected to trend higher to average between 2% and 3% in 2022, according to BNM.