UCSI University Malaysia assistant professor in finance Liew Chee Yoong
PETALING JAYA: Despite elevated crude oil prices, economists do not expect inflation rate to creep up significantly in the short term owing to subsidies and price control measures.
UCSI University Malaysia assistant professor of finance Liew Chee Yoong told StarBiz the elevated oil prices would have some impact on inflation but it will not be significant.
He expects the current elevated oil prices to fuel inflation as it would increase domestic fuel prices.
“This will spur inflation in many sectors as transportation costs will increase as a result of the fuel price hike, which will create a chain effect on many different sectors.
“However, Malaysia’s measures to retain electricity tariffs and other price controls are expected to ease inflation pressures in the short term,” said Liew, who is also a research fellow at the Centre for Market Education.
On the inflation rate, he expects an average of between 3% and 4% for the entire year.
He reiterated that inflationary pressures are expected to be contained due to measures like maintaining electricity tariffs and subsidies on items such as chicken and eggs.
Nevertheless, Liew said he anticipates inflation to impact goods and services in the food and beverage (F&B), transport, restaurant and hotel sectors.
Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid
Bank Muamalat Malaysia Bhd chief economist and social finance head Mohd Afzanizam Abdul Rashid agrees with Liew that elevated oil prices may not fuel inflation in a big way due to the existence of subsidies and price control measures.
He said this would shield consumers from being affected by the gyrations in the global crude oil prices.
As for inflation, he said his projection is at 3% for this year, led by moderation in food price inflation along with subsidies and price control measures that would keep the rise in cost of living in check.
As for core inflation, Afzanizam said housing rental, which accounted for 18.1% of total consumer price index (CPI), would keep the core inflation elevated as rental is seen to be creeping up.
Core inflation measures changes in the prices of all goods and services, excluding volatile prices of fresh food as well as administered prices of goods by the government.
UCSI’s Liew expects core inflation to be at 4.1%, which is attributed to excessive spending and due to the economic reopening effects as a result of the Covid-19 pandemic.
“This inflation is mainly from restaurants, hotels, recreational services and household maintenance. The stickiness of core inflation is still evident, which shows a continued resilience in domestic demand,” he noted.
Based on the Statistics Department data, the CPI had decelerated to 2.4% year-on-year (y-o-y) in June from 2.8% y-o-y in May and 3.3% y-o-y in April.
The sustained decline in price pressure was mainly attributable to a moderation in food prices and restaurant and hotel costs. All in, the headline CPI increased 3.3% y-o-y for the first half of 2023. Headline inflation is measured by the CPI.
The headline inflation in June was in line with the expectations of economists polled by Reuters.
The Statistics Department noted that Malaysia’s inflation rate of 2.4% was lower than the inflation in South Korea, Indonesia and the Philippines
Meanwhile, according to analysts, the country’s inflation risk remains biased to the upside due to geopolitical tensions such as Russia’s withdrawal from the Black Sea grain deal as well as changing weather conditions that could affect global food and commodity prices.
CGS-CIMB Research pointed out that the recent dismantling of the Black Sea grain corridor, whereby the agreement to allow the export of food and fertiliser from both Ukraine and Russia to the global market has not been renewed, posed an upside risk.
“This may have an adverse effect on food inflation, leading to higher price volatility.
“Thus far, the spike in global commodity prices is still well below the recent historical peak in 2022, although this warrants close monitoring,” the brokerage said in its report.
Malaysia University of Science and Technology professor Geoffrey Williams.
Economics professor at the Malaysia University of Science and Technology Geoffrey Williams said oil prices have been rising of late but are still much lower than they were last year.
He said, therefore, the annual change would still be negative and the effect would be to keep the oil component of the CPI down.
“Brent oil prices have been mainly between US$70 (RM320) and US$80 (RM366) per barrel for most of the year. They are a little elevated now and may trade between US$75 (RM343) and US$85 (RM380) for the rest of the year.”
As at press time, the international benchmark Brent crude was down by 0.27% to US$85.15 (RM391) per barrel.
Brent crude oil prices averaged at US$101 (RM470) per barrel in 2022, compared with about US$71 (RM330) in 2021.
Williams expects headline inflation to fall further than 2.4% for the rest of the year.
Food prices and restaurant prices, although slightly high, also appear to be slowing based on the latest data for June.
As for core inflation, he anticipates it to also ease but would be elevated above its historical average for the rest of the year due to some downward stickiness in core prices.
On the status of the overnight policy rate (OPR) for the remainder of the year, Williams does not foresee any change in the key benchmark interest rate in the next two Bank Negara’s Monetary Policy Committee meetings in September and November.
Some economists are upholding their views that there could be one more rate hike this year by 25 basis points to 3.25% from the current 3%.
Liew expects the central bank to increase the OPR this year as the US Federal Reserve (Fed) had increased its federal fund rate by 0.25% to 5.5% as of July 2023.
If Bank Negara does not raise the OPR, the country risks capital outflow, which may depreciate the value of the ringgit as the interest rate differential between Malaysia and the United States has increased, he noted.
Afzanizam anticipates the OPR to be maintained at 3% throughout the year.
“At the current rate, the OPR is already deemed to be normalised, as the rate is within the normal range of 3% to 3.25% when the economy was growing at 4.4% to 6% between 2011 and 2019.
“At the prevailing OPR level, the stance of monetary policy is still deemed to be accommodative. This is crucial as we need to promote investment activities.
“The implementation of major infrastructure projects and capex plans among the private firms in the key sectors such as in manufacturing and services would mean that it requires cost of borrowings to be stable.
“This will facilitate their strategic planning on the current and upcoming projects,” he said.
OCBC Bank economist Lavanya Venkateswaran
OCBC Bank economist Lavanya Venkateswaran said the bank’s projection is for oil prices to move higher and average US$90 (RM412.83) a barrel for the fourth quarter of the year.
“This will exert some inflationary pressure but the impact will be cushioned by fuel subsidies. Pressure on the fiscal position, however, could build as a result,” she said.
She is forecasting the average headline inflation to be at 2.9% y-o-y for 2023 from 3.4% in 2022. This implies moderating inflation in the coming months, she said.
Venkateswaran expects core inflation to be stickier than headline inflation and projects core inflation to average 3% y-o-y this year, similar to 2022.
The risks are to the upside given resilient domestic demand conditions, she said.
On OPR, she said: “Our baseline is for Bank Negara to remain on hold for the rest of this year. However, similar to other global and regional central banks, the central bank has not closed the door on further rate hikes.
“Changes to the targeted subsidy framework (possibly to include diesel), persistently higher food prices on account of the El Nino phenomenon and visible second-order effects are some of the triggers for the central bank to consider an incremental rate hike, in our view.
“On the flipside, we think growth is resilient enough precluding rate cut discussions,” she said.
