Malaysian headline inflation decelerates in February, likely to ease further in 2018

Headline inflation in Malaysia slowed in February from the prior month. The consumer price index dropped to 1.4 percent year-on-year from 2.7 percent. On a sequential basis, headline inflation came in flat in February, compared with a 0.3 percent month-on-month rise in January. Core inflation also slowed down to 1.8 percent year-on-year from 2.2 percent year-on-year previously.

A contraction in transport costs was expected. However, the actual decline of 0.6 percent sequentially in transport costs was larger than expected. The increase in food prices was also below expectations. However, the real surprise in the data was the easing of price pressures in components of the CPI basket that could be characterized as ‘tradables’. These include clothing and footwear, furnishings and household equipment and miscellaneous goods. The price levels of each of these components dropped on sequential basis.

The Malaysian central bank expects headline inflation to ease this year from a full-year average of 3.7 percent year-on-year in 2017. Both higher base effects and stronger Malaysian ringgit would help.

“Our full year 2018 CPI forecast is 2.7 percent (2017: 3.7 percent) and assumes that the impact of some supporting factors such as high base effects and easing food prices will potentially correct over a period of time”, noted ANZ in a research report.

Meanwhile, the OPR is likely to be risen by 25 basis points to 3.50 percent in September. BNM is expected to take advantage of the solid growth environment to further normalize monetary policy.

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