Senior Economist Julia Goh and Economist Loke Siew Ting at UOB Group comment on the latest inflation figures release in Malaysia.

Key Takeaways

“Headline inflation eased to a six-month low of 3.8% y/y in Dec (from 4.0% in Nov), in line with our estimate (3.8%) and Bloomberg consensus (3.9%). This brought the full-year inflation rate to an average of 3.3% (2021: 2.5%), coming in a tad lower than our estimate (3.5%) but matching official forecast (3.3%). Dec’s inflation was primarily pulled down by slower food, transport, recreation services & culture, and personal care price inflation amid year-ago high base effects. This helped to offset the persistent rise in restaurants & hotels price inflation and an uptick in housing, utilities & other fuels price inflation.”

“In the absence of domestic policy changes for price-administered items particularly fuels and utilities, we expect headline inflation to continue its downward trend towards year-end. This will result in an average inflation rate of 2.8% for the entire year of 2023 (MOF est: 2.8%-3.3%). Volatile global commodity and non-commodity prices, domestic policy changes, the persistence of post-pandemic demand, and currency movement are key wildcards for our inflation outlook.”

“Although Bank Negara Malaysia (BNM) unexpectedly took a prudent pause on its interest rate hike … the central bank guided that they are not done with the interest rate hikes yet and future rate move remains data dependent. In our view, recent global developments and country-specific factors suggest rising challenges for BNM to hike further in the near term. Hence, we have dialed down our expectation to just one more 25bps hike to bring the Overnight Policy Rate (OPR) back to pre-pandemic level of 3.00% by mid-2023, before taking a long pause for the rest of the year.”