Malaysia: A reprieve for the local economy

PETALING JAYA: The local economy received its much needed reprieve when the consumer price index (CPI) showed signs of cooling in May.

Headline inflation rose at a slower rate of 2.8% year-on-year or y-o-y (April: 3.3%) and core inflation eased slightly to 3.5% y-o-y (April: 3.6%) last month.

While this bolsters hopes that the monetary tightening policies undertaken by Bank Negara are bringing price rises under control, economists remain split on their forecast of the central bank’s decision to implement further rate hikes, ahead of the central bank’s upcoming monetary policy committee (MPC) meeting on July 5 to July 6.

Sunway University economics professor Dr Yeah Kim Leng told StarBiz that the decline in the headline inflation by a sizeable 0.5% in May is indicative of the lowering of food prices and energy items, which make up the volatile components in the CPI basket.

“With global demand decelerating more strongly as reflected in Malaysia’s export slowdown, global commodity prices – especially energy – are projected to weaken, leading to core inflation exceeding headline inflation.

“With persisting core inflation, central banks – including Bank Negara – will therefore remain vigilant of inflation pressures and are likely to maintain a hawkish stance.

“Nevertheless, there is a strong probability that the overnight policy rate (OPR) will remain unchanged for the rest of the year.

“This is given the easing of inflation amid weakening growth in both the global and domestic economy,” said Yeah, who is also one of the recently-appointed finance advisers to Prime Minister and Finance Minister Datuk Seri Anwar Ibrahim.

University of Science and Technology economics professor Geoffrey Williams also concurred that lower inflation figures ease the pressure on Bank Negara to raise the OPR.

He expects inflation to continue to slow towards 2.5% in the next month or so and to remain low for the rest of the year.

“The lower inflation figures show that the policies of Bank Negara as well as the government are working but there are also global factors, especially oil prices, which are around half the level now than they were last year.

“This is good news for the economy and suggests that no further action is required through the OPR. Instead the focus can be on stabilising growth against a slower global economy,” he noted.

Williams added that the emphasis on the “prices” battle has shifted to maintaining price levels and affordability and not so much on inflation or price increases.

As such, the government needs to promote competition, remove monopolies and help consumers make smart choices.

“The government must also help in combating ‘greedflation’, where companies are passing on cost increases to customers to protect their own profits.

“For example, there may be a rise in the price of rice this month as greedy companies pass on costs to consumers,” he noted.

However, Centre for Market Education chief executive officer Dr Carmelo Ferlito said the implementation of interest rate hikes to keep inflation at bay is not a clear cut solution.

This is because other factors such as the behaviour of the ringgit and the overall economic performances, both domestically and internationally, also play a role in inflation, he said.

“I believe that in the general economic conversation, the role of interest rate is overestimated and the main driver for economic decisions is profit expectations.

“While Bank Negara did what it could to try to strike a balance between inflation, the ringgit and the fear of a global economic downturn, the current ringgit difficulties are mainly derived from other factors, which are concurrently at play – China’s difficulties and the too strong relationship between Malaysian and China.

“Domestically, instead, political uncertainty pairs with the lack of a comprehensive economic strategy with different ministries sending out contrasting signals, fluctuating between more business-friendly moves and the strong desire of the government to remain in control with burdensome regulations on prices and labour, among others,” he said.

Ferlito said the depreciation of the ringgit may create new price tensions (which he deems not to be inflation) but translates into price increases and a new structure of relative prices.

“This may push the local central bank toward another hike. However, if the government decides to implement an aggressive pro-market strategy, we may observe the opposite,” he said.

Meanwhile, CGS-CIMB Research has cut its CPI inflation forecast for the year to 2.8% y-o-y from 3.3% previously, to reflect the lower-than-expected increase in electricity tariffs for the second half of 2023.

The research house said it expects Bank Negara to keep the OPR at 3% in the upcoming MPC meeting in July.

“We think there are still pressures on inflation as the Statistics Department said it expects the recent disruption in vegetable supplies since May (after the Southwest Monsoon) to continue until September.

“Moreover, the government has recently announced its intention to extend the subsidy on the prices of chicken and eggs.

“However, price pressures remain high, especially in the fresh meat category. We are also seeing ongoing price pressures for tourism-related components, particularly hotel accommodation, likely reflecting the rising number of tourists,” it said in a report.

TA Research said the average y-o-y growth rate of headline inflation in the first five months of this year was 3.4%, which was slightly slower than the 3.5% recorded in the first quarter.

The research firm forecasts the inflation rate to remain around this level in June, likely to be slightly lower by 0.1 percentage point.

“This projection is primarily based on our anticipation of reduced transportation costs, which can be attributed to a substantial decline in the average pump price to RM2.52 per liter, reflecting a y-o-y decrease of 15.6% in June (May: down 10.6%).

“Additionally, we expect other related segments to normalise, further contributing to the sustainability of the inflation rate,” it said in a report.

TA Research said the Brent crude oil is on a downward trajectory, currently standing below US$75 (RM350.51) per barrel.

As of June 23, Brent crude oil saw a year-to-date decline of 13.4%, with the price reaching US$74.44 (RM347.90) per barrel. This represents a decline from its value of US$85.99 (RM401.87) per barrel recorded at the end of the previous year.

“Despite core CPI remaining sticky at 3.8% year to date, we still anticipate there will be no further rate hikes this year, as the central bank should take into account the growth prospects of the country.

“While it is true the Unite States may raise its interest rates by at least two times, we hold the belief that such actions will mark the conclusion of its tightening policy,” the research firm said.