Economists expect Bank Negara to continue normalising interest rates by raising the overnight policy rate gradually to 3.25%.
PETALING JAYA: Despite the persistent cost pressure, headline inflation – as measured by the change in consumer price index (CPI) – in Malaysia is expected to moderate in the year ahead.
Among the factors contributing to this is the strengthening of the ringgit, slowing global demand, easing commodity prices as well as government’s move to maintain subsidies over the medium term.
Still, economists expect Bank Negara to continue normalising interest rates by raising the overnight policy rate (OPR) gradually to 3.25%.
Kenanga Research said the central bank would likely raise the OPR by 25 basis points (bps) next month to 3% to further realign with the global monetary tightening trend and curb the persistently high core inflation.
It assigned a 50% chance of another 25 bps hike in March.
“We reckon that the terminal rate would be around 3% to 3.25%, in line with the long-term OPR average, after which we expect Bank Negara to keep it unchanged for the rest of 2023,” the brokerage wrote in a report yesterday.
Kenanga Research expected the country’s CPI to moderate to 2.5% in 2023 from the projected 3.3% this year versus 2.5% in 2021.
“Despite our expectation that core prices may start to trend lower in the next few months due to a drop in prices of imported inputs amid the strengthening ringgit and slowing global demand, risks remain skewed to the downside due to elevated economic uncertainties.
“However, inflation may start to ease in the second quarter (2Q) of 2023, as the new government made tackling the rising cost of living its priority, while maintaining subsidies till at least end of 2Q23.
“This, coupled with the eventual reopening of China and the normalisation of supply chain, may bring the CPI down to 2.5% on average in 2023,” it explained.
TA Research expected CPI to ease to around 3% in 2023 from its estimate of 3.4% for 2022.
It said as core inflation reached a new peak of 4.2% year-on-year (y-o-y) last month, Bank Negara would likely raise the OPR by 25 bps in January meeting, and another 25bps in March, pushing the OPR to settle at 3.25%.
“This could lead to Malaysians having tighter budgets, reduced demand for goods and eventually lower pricing. As a result, prices could drop by around 3% next year.
“The expectation that fuel subsidies will continue, along with the strengthening of the ringgit and normalising commodity prices, will also contribute to the moderate annual growth,” TA Research explained.
Malaysia’s CPI rose 4% last month, bringing the average CPI to 3.4% for 11 months to November this year.
Meanwhile, Centre for Market Education Sdn Bhd (CME) suggested several policy measures for the government to tackle inflation in the country.
These included allowing productivity growth deflation by nurturing an environment conducive to innovation; promoting cash-building deflation, as savings are the necessary means for enhancing a process of sound growth; gradually reducing government spending to reduce the quantity of money in circulation; and introducing reforms to reinstate the primacy of balanced budgets.
“If the government wishes to be serious in tackling inflation, it should first be able to properly recognise its cause and to implement an adequate communication policy.
“A U-turn in fiscal policy is the most important factor,” CME chief executive officer Dr Carmelo Ferlito said in a statement.
“Restoring saving is important but this cannot be done with impossible policies such as ‘changing elasticity’; rather, financial literacy should be promoted.
“Furthermore, if the government wants the people to be responsible with their finances, it should send a signal by being responsible with its own finances, which are indeed made up of money collected from the people via taxation,” he added.
