As June inflation cools to 14-month low, economists mixed on BNM's OPR plans

• MIDF Research, however, thinks that the steady domestic demand and sticky core inflation that lingered above 3% — as opposed to the pre-pandemic average of 1.7% — may lead the central bank to consider another 25bps hike of the OPR before the year is out. 

KUALA LUMPUR (July 25): Inflation in Malaysia moderated for a fourth straight month to 2.4% year-on-year in June — the slowest since April 2022 — contributed by almost all consumer price index (CPI) components except for healthcare, with food inflation softening to its lowest in more than one year at 4.7%.

While the drop in the headline inflation matched Bloomberg's consensus forecast, core inflation, which dipped to 3.1% from 3.5% in May, remained above the pre-pandemic average of 1.7%, despite having decelerated for seven consecutive months to its lowest level since June 2022. It also remained higher than the headline inflation for the ninth succeeding month, with the gap widening further to 0.8 percentage point (May: 0.7).

This led to differing views from some economists as to whether Bank Negara Malaysia (BNM) will hike the key rate further following the surprise 25-basis-point (bp) increase in April, or to leave it unchanged for the rest of the year.

UOB Bank's economists Julia Goh and Loke Siew Ting, who see the year-to-date inflation reading of 3.2% for the first half of 2023 (versus 2.5% in 1H2022) validates their full-year inflation projection of 2.8% (BNM estimate: 2.8%-3.8%), while slowing core CPI growth and services inflation suggest "a continued disinflation trend for the remaining months of the year".

As such, the duo does not see a strong reason for BNM to raise its policy rate further this year amid the latest inflation outturns, downside risks to domestic growth momentum, and the near-peak global monetary tightening cycle.

"Real interest rates have turned positive for the second straight month. Both core inflation and services inflation decelerated to the lowest level in a year. All these reflect the lagged effects of past interest rate hikes amid persistent labour market slack. Hence, we continue to expect BNM to leave the overnight policy rate (OPR) unchanged at 3.0% for the remainder of the year," they wrote in a note on Monday (July 24).

MIDF Research, however, thinks that the steady domestic demand and sticky core inflation that lingered above 3% — as opposed to the pre-pandemic average of 1.7% — may lead the central bank to consider another 25bps hike of the OPR before the year is out. Core inflation, it noted, averaged 3.6% in the first six months of this year (6MCY2023), higher than last year's 3%.

It also noted that the job market has been improving, with employment growth hitting above 2% — as opposed to the pre-pandemic average of 1.7% —  for 20 straight months since October 2021, while distributive trade sales continued to grow at a double-digit pace of 10.2% in the first five months of this year (2022: 19.6%).

As such, MIDF kept its forecast for Malaysia’s headline inflation at 3.0% for 2023, as opposed to 2022's 3.3%. "As of 6MCY2023, average food inflation registered at 6.2%, much higher than previous year’s 5.7%. As for non-food inflation, we expect the government will keep retail fuel prices status quo at least until the end of this year. Non-food inflation is expected to average at 1.5% (6MCY2023: 1.7%). Considering both CPI components, we foresee Malaysia’s headline inflation rate to touch 3% for 2023," it said in its note on the CPI.

RHB Bank economists Chin Yee Sian and Wong Xian Yong also kept their 2023 headline inflation forecast at 3% and their core inflation projection at 3.5%, though with the balance of risks tilted towards lower-than-expected headline and core inflation projections of 2.6% and 3.1%, respectively.

"On domestic front, we could foresee some dissipation of risks factors that we mentioned earlier, which are (1) significant changes in fuel and food subsidies mechanism are unlikely to materialise in near term; (2) the impact of electricity tariffs adjustment is relatively limited on the headline inflation," they wrote in a separate note to clients.

However, they remain cautious on the future movements of food and commodity prices. "Our concerns are driven by three recent key developments, which are: (1) Russia’s withdrawal from the Black Sea grain deal; (2) the potential impact from El Nino weather conditions as well as (3) the global oil prices to remain well supported or rise in 2H2023."