• Moody’s expects the local economy to slow in 2023 given external demand for its manufactured goods has weakened, mainly due to the slowing Chinese economy

KUALA LUMPUR (Dec 30): Economists expect more overnight policy rate (OPR) hikes to combat inflationary pressures in 2023, with CGS-CIMB expecting two more 25-basis-point increases to 3.25% from 2.75% currently.

“November’s strong core inflation growth reflects strong domestic demand conditions during the month.  

“We see this as supportive of the continued rate normalisation cycle by Bank Negara Malaysia (BNM) as it has in its November statement provided a clear warning that inflationary pressures are likely to remain in 2023,” said CGS-CIMB economist Nazmi Idrus in a note on Friday (Dec 30).

In November, Malaysia’s consumer price index (CPI) rose 0.3% month-on-month (m-o-m) and 4% year-on-year (y-o-y), higher than the house’s and Bloomberg's expectations.  

Meanwhile core CPI gained 0.4% m-o-m, raising y-o-y growth to 4.2% (Oct 22: +4.1%).  

“Two components that drove Nov 22 core CPI were food and hotels and restaurants. For food, the subcomponent food away home was the major propeller, rising 9.6% y-o-y (0.9% m-o-m), the highest since Oct 8,” said the note.

CGS-CIMB noted the government’s intervention on administered items, such as chicken prices, petrol and toll fees, to partly contain inflation in the near term.  

However, it said the recent electricity price hike for non-domestic and non-SME (low voltage) users that will take effect on Jan 23 is expected to lead to some increase in headline inflation.  

“Our calculation highlights a possibility of CPI rising 10 basis points y-o-y on Jan 23 as roughly 60% of electricity users in the country are non-domestic users, and of these, 60% are non-SMEs,” it said.

It noted that electricity weight to the CPI basket is at 2.7% but the second-round effect could be slightly larger.  

Overall, CGS-CIMB is keeping its 2023 inflation forecast at 3% y-o-y, softer relative to 2022 CPI inflation of 3.3% y-o-y.

Moody’s Analytics also expects BNM to continue to hike its policy rate into early next year.

“Inflation pressures will begin to moderate next year as supply-side pressures ease,” it said in a statement.

It noted BNM reiterated its hawkish stance in its November meeting, noting that it will “preemptively manage the risk of excessive demand on price pressures”.

Moody’s expects the local economy to slow in 2023 given external demand for its manufactured goods has weakened, mainly due to the slowing Chinese economy.

It said the slowing demand for consumer electronics amidst weakness in the global economy is starting to be felt and will drag on manufacturing next year.

Nonetheless, the slower exports to China will be offset by the robust trade with Southeast Asian economies, as well as with the US and the EU, it added.

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