The trend for discretionary goods in the tax-free window likely to gradually reverse as vendors adjust to the new tax system
By NG MIN SHEN / Pic By MUHD AMIN NAHARUL
RAM Rating Services Bhd (RAM Ratings) has projected Malaysia’s headline inflation rate to rise to 0.9% in September from 0.2% in August following the reinstatement of the Sales and Services Tax (SST).
RAM Ratings head of research Kristina Fong said there was a noticeable deflationary trend for discretionary goods in the three-month tax-free window, thus creating moderate downward pressure on the headline number.
“We expect this trend to gradually reverse as vendors adjust to the new tax system,” she said in a statement yesterday.
On the upside, some of the upward pressure is anticipated to be partly offset by the moderation in transport fuel inflation, which climbed 0.5% in September this year versus a 3.9% hike in August 2018 due to the corresponding rise in the price of RON95 fuel a year ago.
The rating agency noted that transport fuel inflation should also continue to ease through the rest of 2018 as low-base effects subside further.
For the full year, it expects overall inflation to ease to 1.3%, compared to 3.7% in 2017 — largely due to easing in food inflation, the reintroduction of fuel subsidies and the zero-rating of the Goods and Services Tax.
“Going forward, headline inflation is expected to accelerate to between 1.7% and 2.5% in 2019, with the higher end of this range primarily hinging on the shift to a targeted fuel-subsidy mechanism.
“Should fuel subsidies become more targeted, the higher market price of fuel will feature more prominently in headline inflation, thus elevating the inflationary impact as opposed to the current blanket fuel-subsidy system,” it said.
The rating agency also said that other possible upside pressures on inflation in 2019 include a potentially higher rate of cost pass-through by firms to consumers on account of higher costs of doing business, as well as a slightly weaker ringgit against the US dollar next year.
“The quickening growth of the Producer Price Index (PPI) leaves less room for firms to absorb any cost increase, unlike in 2018 when PPI expansion was below zero during the first five months of the year.
“Inflation could also pick up from the relatively benign estimate for 2018, as policy-induced effects subside,” it noted.
The ratings firm expects Bank Negara Malaysia to maintain the Overnight Policy Rate at 3.25% through 2018 and 2019, given the need to balance between capital outflows and risks to GDP expansion.
“Although headline inflation is envisaged to accelerate from the benign level of 2018, the pace of increase is still 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 stated.