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Low Energy Prices To Limit Malaysian Inflation

06/22/2015

Malaysia / Inflation

Malaysia’s inflation saw some lift in May, but low energy prices are expected to keep price pressures manageable.

Malaysia’s consumer price index (CPI) inflation registered 2.1% on-year in May, in line with our expectation that it would cross the 2.0% mark. A fairly low base, pre-Ramadan spending, and some second order goods and services tax (GST) price effect were at work, driving prices higher in the month.

Nonetheless, the GST effect has, thus far, been fairly muted. The pass-through effect of the 6% tax hike has been significantly less than our earlier expectation of a 1.5 percentage point increase in headline CPI inflation.

More importantly, the main reason for the benign inflation outlook is low energy prices. Oil prices have bottomed and inched slightly higher to about US$ 60 per barrel. Barring a sharp rebound in oil prices in the coming months, inflationary pressures should remain manageable. In fact, full-year inflation is expected to remain benign at 2.1%.

With stable inflation and depreciative pressure on the Malaysian ringgit, Bank Negara will continue to stand pat on monetary policy, maintaining the overnight policy rate at 3.25% for the rest of the year.