Malaysia’s inflation rate eased further to 1.3% year-on-year in September, the lowest level since February 2010! How would you know Malaysia true inflation rate in a subsidised environment?

BNM to keep OPR steady until year-end on easing inflation

KUALA LUMPUR: Analysts expect Bank Negara to hold the overnight policy rate (OPR) steady at 3.0% until year-end due to easing inflation. Alliance Research said the current rate would continue to be at an accommodative level in promoting growth while ensuring adequate levels of price stability.

Malaysia’s inflation rate eased further to 1.3% year-on-year in September, the lowest level since February 2010, driven mainly by moderation in food inflation which offset higher transport cost. In a note today, the research firm also said the moderation could be attributed to the high base effect from the subsidy rationalisation exercise a year ago as well as moderation in commodity prices.

“Given its low levels, we believe inflation risks are minimal, ensuring that it is not a concern for the central bank. “Nonetheless, BNM would be closely monitoring the impact of the quantitative easing in the US and Japan, and avert any destabilising effect on the domestic economy,” it added. Hong Leong Investment Bank (HLIB) expects the inflation rate for the fourth quarter to remain benign at the consensus estimate of 1.4% in the absence of major changes in administrative prices.

Given the lower-than-expected food inflation, HLIB is lowering its inflation forecast for 2012 by 0.01 percentage point to 1.7% while for 2013, the consumer price index (CPI) growth is expected to edge higher to 2%. “We expect similar mild inflation trend to persist in the first half of 2013 on account of stable commodity price and no change in administrative prices,” it said. It noted subsidy removal is expected to resume in mid-2013 with price hikes for fuel, electricity and natural gas, adding this would cause the CPI growth to jump in the second half of 2013.

Meanwhile, OSK-DMG Group Economics is maintaining its 2012 inflation rate forecast at 1.7% and 2.5% for 2013, respectively, though the risk is expected to remain on the upside in 2013. It noted inflationary pressure could pick up next year due to subsidy cuts which should come after the general elections and resilient domestic demand.

OSK-DMG believes the central bank could respond to increasing inflationary pressures by hiking the policy rate by 50 basis points to 3.5% in 2013. Nevertheless, Kenanga Research is maintaining its 1.9% CPI forecast for 2012 and does not expect any subsidy cuts for fuel prices so close to the election or even too soon afterwards. “A mild spike in the food index is expected from November onwards due to the slight reduction of subsidy of sugar. However, that would not be enough to bump up the overall CPI,” it said.

– Bernama

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