Surging food prices last month pushed Malaysia’s inflation to its highest in 14 months, with the consumer price index (CPI) rising 4.4% year-on-year (y-o-y), bolstering chances for another 25-basis-point (bps) hike in the overnight policy rate (OPR) by Bank Negara Malaysia (BNM) at its Monetary Policy Committee (MPC) meeting next week.
The last time Malaysia’s inflation rate topped 4% was May last year, when the CPI similarly climbed 4.4% y-o-y.
The rising inflation and strong economic growth prospect have further strengthened expectations of another BNM OPR increase, economists said.
UOB economists Julia Goh and Loke Siew Ting expect the central bank to raise the OPR by 25 bps at its upcoming MPC scheduled for Sept 7-8, which would raise the OPR to 2.5% by year-end.
“Given a robust gross domestic product growth print in 2Q22 (second quarter of 2022), signs of further economic expansion in the second half this year (2H22) albeit at a moderate pace, and broadening second-round effects on inflation, BNM will likely follow through with a third 25 bps rate hike at the coming monetary policy meeting,” the UOB economists said in a note on Monday (Aug 29).
“Besides internal factors, we believe the expected outsized Fed (US Federal Reserve) rate hikes in the coming months and global monetary conditions would also be taken into consideration by BNM at the September meeting,” they added.
Their September rate hike expectation was also premised on the anticipation that inflation would average higher to 3.5% this year, from their earlier estimation of 3%. UOB’s full-year inflation forecast is above BNM’s forecast range of between 2.2% and 3.2%.
The combination of factors, including year-ago low base effects, still-high commodity prices, persistent currency weakness and intensifying cost pass-through effects, would continue to keep headline inflation above 4% for the remaining months of the year, said Goh and Loke.
“Our revised inflation outlook has yet to factor in the impact of the new targeted fuel subsidy mechanism that is currently under pilot testing since July. This new mechanism utilising e-wallets would be trialled for three to six months before it is implemented nationwide,” they said.
HSBC economist Yun Liu, likewise, is expecting another 25 bps OPR hike next week.
“Given rosy growth outlook and rising inflation, it is increasingly clear that BNM will keep pressing the tightening brake. Despite rising inflation, we do not think it warrants an aggressive tightening move. We believe BNM will continue to do it in a ‘measured and gradual manner’. After two back-to-back rate hikes of 25 bps each, we expect the central bank to hike by another 25 bps at its upcoming Sept 8 meeting, bringing its OPR to 2.5%,” she said.
She expects normalising domestic demand amid an improving labour market to be reflected in rising core inflation, as the country continues to reap tailwinds of the economic reopening.
“As such, despite benign inflation in 1H22, we expect inflation pressure to intensify in 2H22, averaging around 4%. But this will go well above BNM’s inflation forecast range of 2.2%-3.2%, though we expect 2022 inflation to average at the upper end of the range,” she added.
MIDF Research, on the other hand, keeps its CPI forecast of 2.8% for 2022 as it sees a slight downturn in global commodity prices that may ease Malaysia’s food inflation pressure in 2H22.
According to the research house, the ringgit’s depreciation against the greenback has partly contributed to the spike in food inflation, which increased 6.9% y-o-y in July, the highest ever recorded.
“Moving forward, we expect Malaysia’s domestic food inflation to decelerate to a more moderate pace in [2H22] following the correction in global commodity prices particularly agriculture-related prices.
“In addition, global food inflation as reported by FAO (Food and Agriculture Organization) of UN (United Nations) descended to 18-month low at 13.1% y-o-y in [July]. We expect resumption of grain exports via Ukraine’s Black Sea ports will ease global food inflation pressure in the near term,” it added.
It forecast food inflation to average at 4.5% for 2022, compared with 1.5% in 2021.
July’s inflation gauge in line with market expectations
According to the Department of Statistics Malaysia (DOSM), food and non-alcoholic beverage component was the main contributor to the 4.4% increase in July’s CPI, which came in line with both Bloomberg and Reuters median estimates of 4.4%.
“The inflation for the period of January to July 2022 increased 2.8% as compared to the same period of the previous year. On a monthly basis, the [July] inflation increased 0.4% as compared to [June],” DOSM said in a statement.
Apart from food inflation, DOSM said the increase in Malaysia’s inflation was also due to the lower base effect last year, when an electricity bill discount of 5% to 40% was given to domestic consumers according to their total usage under the National People’s Well-being and Economic Recovery Package (Pemulih) from July to September 2021.
For July 2022, apart from the food and non-alcoholic beverage group, all other groups within the CPI also continued to record y-o-y increases, except the communication segment, which remained unchanged, said DOSM.
“Restaurants and hotels increased 5.8% followed by transport (5.6%); furnishings, household equipment and routine household maintenance (4%); and housing, water, electricity, gas and other fuels (3.8%).
“Meanwhile, recreation services and culture also registered an increase of 2.5%, miscellaneous goods and services (2.1%) and education (1.2%),” the DOSM added.
