KUALA LUMPUR: RAM Ratings sees inflation declining to -0.5% in January 2019 from +0.2% in December amid deflationary pressures from the transport fuel component.

In its outlook report issued on Thursday, it said the average price of RON95 petrol was markedly lower (-13.1% on-year) at RM1.98 a litre in January, following the switch to the weekly fuel price mechanism based on the Automatic Price Mechanism (APM).

The new regime has led to a more direct and immediate transfer of actual global oil prices to end-consumers.

“Looking ahead, headline inflation is projected to accelerate to 2.0% this year, mainly driven by our expectation of continued spillover effects from the reintroduction of the Sales and Service Tax and low-base effects during the three-month window without the Goods and Services Tax (June-August 2018).

“The impact is envisaged to be particularly pronounced for the food component, and will be the key driver of overall inflation in 2019,” it said.

RAM said the transport component was unlikely to repeat the impact it had last year, contributing to 1.7 percentage points of the overall 2.8 percentage point on-year decline in 2018’s headline inflation.

“Inflationary pressure from the transport component are still expected to be relatively muted this year against generally softer global oil prices. Even so, there may be some slight upward price pressure in 2H 2019 following the switch to targeted fuel subsidies,” Kristina Fong, RAM’s head of research said.

“We expect Brent crude prices to average US$60-US$65 per barrel this year, compared to US$71 per barrel in 2018.

“Looking ahead, we anticipate Bank Negara Malaysia to maintain the OPR at 3.25% in 2019, given the need to balance between capital outflow pressures and growth support.

“Although headline inflation is envisaged to accelerate this year, the pace of increase will still be rather nondescript as a trigger point, relative to the downside risks to growth from ongoing fiscal consolidation, volatile capital markets, US-China trade tensions and Brexit uncertainties,” she added.