Malaysia inflation likely to register 3.8 pct on year in February, says DBS Bank

Malaysian inflation is set to rise even higher in February. The headline number is expected to register 3.8% YoY last month, up from an already fairly high reading of 3.2% in January. While the low base could have partially contributed to the uptick, hikes in pump prices on the back on the turnaround in global energy prices is expected to remain the key driver, DBS Bank reported.

Transport CPI inflation for example, rose by 8.3 percent y/y in January. This is significantly higher than the full year average of -4.5 percent in 2016. Plainly, the entire trajectory for inflation has been lifted. The headline number is expected to stay above the 3 percent mark for the coming months before easing towards the 2 percent level in the second half of the year.

Higher inflation essentially implies that real policy rate (OPR) will remain negative in the months ahead. And this could prompt tightening bias in monetary policy. That said, Bank Negara held policy rate steady at 3.00 percent in the meeting earlier this month.

"Indeed, we do not expect Bank Negara to respond to such transient supply side effect since inflationary pressure is expected to subside towards the latter part the year. Moreover, any unexpected easing in monetary policy (i.e., rate cut) could well stoke unintended depreciative pressure on the ringgit amid an ongoing US Fed tightening cycle," the report said.