Malaysia: Inflation seen rising to 2.7% next year on higher fuel prices and SST

KUALA LUMPUR: RAM Ratings expects headline inflation to speed up to 2.7% in 2019 after averaging 1% in 2018, mainly due to higher fuel prices and the reintroduction of the sales and service tax (SST).

The rating agency said there would be additional pressure from the switch to targeted fuel subsidies, along with its anticipation of continued spillover effects from the reintroduction of the SST and low-base effects during the zero-rated goods and services tax from June to end-August.

“Although key details on the implementation (exact date and disbursement mechanism) are still scant, our preliminary analysis indicates that the decision to float the price of RON95 based on the automatic price mechanism will lift headline inflation by 0.9 percentage points in 2019,” it said in a statement.

RAM said it had conservatively assumed that the new mechanism would commence in early second-quarter 2019 (this is April as opposed to May or June) and that global oil prices would average around the same level next year at US$75 a barrel.

However, for October, it expects inflation to trend higher but still remain benign at 0.5% compared with 0.3% in September, while prices are still adjusting to the reintroduction of the SST.

It pointed out that overall inflation is envisaged to average 1% in 2018 (2017: 3.7%) amid low food inflation, on top of the deflationary pressure from the reinstatement of fuel subsidies through the rest of 2018.

RAM also expects Bank Negara to maintain its benchmark interest rate at 3.25% throughout 2019, given the need to balance between capital outflow pressures and growth support.

“Although headline inflation is envisaged to accelerate next 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 and rising trade tensions,” it said.