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

Key Takeaways

“Headline inflation decelerated for the seventh straight month to a nine-month low of 3.4% y/y in Mar (from +3.7% in Feb). The reading came in below our estimate (+3.5%) and Bloomberg consensus (+3.6%). The slowdown mainly reflected the effects of lower energy prices, high statistical comparison base a year ago, and continued subsidies by the government as prices of most food items and services appeared to remain sticky.”

“Barring any potential changes in domestic price and subsidy policy, we believe the existing disinflationary process will persist throughout the remaining months of the year. But the pace of easing may be more moderate than previously anticipated given the stickiness of core inflation, which has surpassed headline inflation for a sixth consecutive month and implying resilience of domestic demand. We reiterate our 2023 full-year inflation projection of 2.8% (BNM est: 2.8%-3.8%, 2022: 3.3%) with the government’s gradual subsidy rationalization, international commodity price movement, exchange rate fluctuation, extreme weather conditions and stronger demand post China’s reopening serving as key wildcards for the outlook.”

“Backed by sticky core inflationary pressures, still positive domestic growth momentum and domestic financial stability, we continue to see room for Bank Negara Malaysia (BNM) to further normalize its monetary policy back to prepandemic level. Hence, we keep our view for a final interest rate hike of 25bps at the 2-3 May monetary policy meeting, which will take the Overnight Policy Rate (OPR) back to the pre-pandemic level of 3.00%. Thereafter, BNM will leave the OPR unchanged for the rest of the year, in cognizant of a softer inflation outlook globally in 2H23, an expected end to global rate hike cycle by mid2023, and rising recession risks in advanced economies.”