Malaysia's inflation is normalising from peaks, will still remain higher y/y in 2016

The Statistics Department said on Wednesday the March CPI increased by 2.6% to 113.8 compared with 110.9 in the same month last year. On a monthly basis, CPI for March 2016 decreased 0.6% to 113.8 from 114.5. CPI for the period January to March in 2016 registered an increase of 3.4% as compared to the same period last year.

The significant disinflation surprise in Malaysia’s inflation in March is due to a mixture of weaker domestic demand and base effects. Transportation costs, which have a weight of 14% in the CPI basket, fell 8.2% last month, as compared with the rise of 3.6% in February - a major drag.

"The softer inflation print – in spite of a low base prior to GST implementation in April 2015 – reinforces our view of waning domestic demand, although the extent of normalisation was exacerbated by a slump in transportation costs." said ANZ in a report.

Expectation of moderating private consumption increases the likelihood of monetary policy easing at Bank Negara Malaysia’s 19 May meeting. But given liquidity tightness in the banking sector, rate cuts may not be an immediate reaction. Given the adjustments in administered prices and a weaker MYR, Malaysia’s inflation rate will still be higher in 2016 than in the preceding year.