UOB Group’s Senior Economist Julia Goh and Economist Loke Siew Ting review the latest inflation figures in Malaysia.

Key Takeaways

“Headline inflation maintained at 3.7% y/y in Feb (Jan: 3.7%), matching our expectations but coming in a tad higher than Bloomberg consensus’ 3.6%. This came as the moderation in transport and recreation & culture price inflation counterbalanced the rise in price inflation of other CPI components particularly food & non-alcoholic beverages; housing, utilities & other fuels; education; and restaurants & hotels.”

“Backed by year-ago high base effects, a downward trajectory for headline inflation throughout the year remains in sight, barring any potential changes in domestic price and subsidy policy that are expected to be implemented gradually in 2H23. We maintain our 2023 full-year average inflation forecast at 2.8% for now (MOF est: 2.8%-3.8%, 2022: 3.3%) given that inflation risks are capped by ongoing subsidies, existing price controls, remaining spare capacity in the economy, and stable global oil prices. Moderating economic growth and abating supply chain pressures will also help to lessen cost or exchange rate pass-through effects in the near term.”

“That said, core inflation remains a concern amid a positive domestic growth outlook and expectations of limited effects from global banking woes on Malaysia’s financial system. This continues to support our view that Bank Negara Malaysia (BNM) will deliver its last rate hike of 25bps in May, taking the Overnight Policy Rate (OPR) back to the pre-pandemic level of 3.00% and be held for the rest of 2023. Nonetheless, the path for global interest rates including Malaysia’s OPR has turned more complicated following the fallout in the US and European banking sector, suggesting that caution could prevail and moderating economic conditions may keep BNM on the back burner.”