Malaysian inflation likely to hover around 4 pct, BNM to hike rate by 25 bps in January 2018 - ANZ

Malaysian headline inflation decelerated on a year-on-year basis in November. The easing of inflation was mainly because of a combination of favorable base along with below expected rise in transportation costs.

In spite of easing in the annual rate, headline inflation rose 0.7 percent sequential basis, as compared with October’s rate of -0.2 percent. The month-on-month rise was driven by a 3.3 percent rise in transportation cost. This was below expectation based on RON petrol prices, which rose 5.7 percent in the month. Food inflation also rose on a sequential basis to 0.4 percent, reversing the drop of 0.5 percent in the previous month. But on an annual basis, food inflation continued to be limited at 4.4 percent year-on-year in November.

Meanwhile, core inflation slowed a bit on a year-on-year basis to 2.2 percent from 2.3 percent because of a slight easing in inflation in the communication and clothing & footwear segments. According to an ANZ research report, core inflation is expected to rise further in the months ahead after staying in the range of 2.2 percent to 2.5 percent year-on-year since January 2017.

Robust growth is expected to put upward pressure on prices. The economic growth is likely to stay strong at 5.8 percent, driven by domestic and external demand. Sound growth in exports and manufacturing sector has also resulted in a considerable strengthening in the labor market. Wages and employment continue to expand at a strong rate, implying an optimistic outlook for domestic demand conditions.

“Overall, we continue to expect that inflation will hover at around 4 percent, which is at the upper end of the central bank’s 3–4 percent inflation forecast”, added ANZ.

With the solid growth momentum and high inflation, Bank Negara Malaysia is expected to hike the OPR by 25 basis points to 3.25 percent in January 2018.

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