PETALING JAYA: Malaysia’s inflation is expected to trend higher in the second half of 2024 (2H24), mainly due to the recent diesel subsidy reforms.
Nevertheless, the impact is expected to remain manageable, said Hong Leong Investment Bank (HLIB) Research.
“In line with our view, Bank Negara expects inflation to trend higher in 2H24, given the recent rationalisation of diesel subsidies.
“Nevertheless, the increase in inflation will remain manageable due to the mitigation measures to minimise the cost impact on businesses, such as the continued subsidies for logistics and public transport sectors,” it said in a report.
HLIB Research noted that for the year as a whole, the central bank is maintaining its 2024 headline inflation growth forecast of 2% to 3.5% year-on-year (y-o-y).
The research house expects inflation to grow 2.6% y-o-y.
“Moving forward, upside risks to inflation would be dependent on the extent of the spillover effects of further changes to subsidies and price controls, as well as global commodity prices and financial market developments.”
TA Research, meanwhile, noted that both headline and core inflation averaged 1.8% in the first five months of the year.
“As expected, inflation will trend higher in the second half of 2024, amid the recent rationalisation of diesel subsidies. Nevertheless, the increase in inflation will remain manageable given the mitigation measures to minimise the cost impact on businesses.
“Going forward, the upside risk to inflation would be dependent on the extent of spillover effects of further domestic policy measures on subsidies and price controls to broader price trends, as well as global commodity prices and financial market developments.”
For the year as a whole, TA Research said headline and core inflation are expected to average within the earlier projected ranges of 2% to 3.5% and 2% to 3%, respectively.
“All eyes are now on the RON95 subsidy rationalisation, which we believe will be implemented later this year.
“In our opinion, the RON95 subsidy rationalisation is likely to be executed through a gradual and measured approach to minimise potential shocks to the economy and consumers,” said TA Research.
It explained that this careful implementation aims to balance fiscal sustainability with the need to mitigate the impact on household budgets and overall economic stability.
“According to the central bank, inflation pressure in the second half of the year is likely to trend higher.
“However, the shock may be manageable due to the government’s efforts in tackling the potential price hikes.
“These measures aim to mitigate the impact on consumers and maintain economic stability.”
Separately, CGS International (CGSI) Research in a note also said it expects inflation may trend higher, going forward.
However, it said the spillover effect of this is unknown.
“We think Bank Negara’s Monetary Policy Committee (MPC) statement appears somewhat neutral, albeit with increased discussion on the risk of rising domestic inflationary pressures.”
Comparing the latest MPC statement against the one issued on May 9, 2024, CGSI Research said Bank Negara had acknowledged the shift in global monetary policy from “interest rates to remain high for longer” towards “central banks commencing monetary policy easing”.
“On the domestic side, key elements of optimism on Malaysia’s economic growth in May seem to continue into July with positive assessment made to the government’s cash handout programme (namely, the Budi Madani that came alongside diesel subsidy adjustment).
“The portion on inflation warrants closer attention, with Bank Negara admitting that the consumer price index inflation is likely to trend higher in 2H24.”
CGSI Research said Bank Negara appears to remain unsure about the “extent of spillover effect” of the present and upcoming price adjustments.
“This limits the central bank’s thorough assessment, at least for now,” it said.
At its latest MPC meeting last week, Bank Negara maintained the overnight policy rate (OPR) at 3%, its seventh pause in a row.
TA Research said the decision to maintain the OPR was within expectations.
“Our current projection indicates a likelihood that Bank Negara will maintain the OPR at 3% throughout 2024.
“This forecast is grounded in the assessment that Malaysia’s economy is still in the process of regaining robust momentum and faces potential downside risks.”
HLIB Research also said it expects the central bank to keep the OPR unchanged at 3% for 2024.
“Trade activity is also expected to continue strengthening in view of the global tech upcycle.
“Nevertheless, the global growth outlook remains subject to downside risks, including an escalation of geopolitical tensions, stronger-than-expected inflation outcomes and volatility in global financial markets,” it said.
