by ALIFAH ZAINUDDIN/ pic by TMR FILE

RAM Rating Services Bhd (RAM Ratings) yesterday slashed its headline inflation forecast for Malaysia this year to 0% from 0.7% previously on weak global oil prices, generous discounts for household electricity bills and subdued demand.

The credit rating agency said while inflation remained stable at 1.5% in January to February, it is expected to ease to -0.2% in March, dragged by the deepening fall in oil prices which has hit levels not seen in two decades.

“Going forward, we envisage a deflationary trend in the second and third quarters of this year. A key trigger of the downward revision is the likelihood of a deeper and more persistent weakness in oil prices amid a supply glut,” it said in a statement.

Despite a historic deal reached by OPEC+ earlier this month to cut production by nearly 10 million barrels per day (bpd) oil prices continue to remain suppressed.

The cut, which represents around 10% of global supply, may not be enough to offset the overwhelming loss in demand amid the coronavirus pandemic, RAM Ratings said.

It added that the US Energy Information Administration expects global oil demand to shrink 5.2% in 2020, against the 1% contraction during the global financial crisis in 2009.

“As such, we have lowered our average price assumption for Brent crude to between US$35 (RM152.95) and US$40 in 2020. This is estimated to lower full-year inflation by approximately 0.4 percentage point,” the ratings firm said.

Meanwhile, another trigger for the downward inflation projection is the substantial discounts on electricity tariffs for households as announced under the government’s recent stimulus package. The government last month announced added rebates on electricity tariffs which included discounts of up to 50% for six months depending on usage.

RM530 million has been allocated for this, on top of the RM500 million allocated previously. Households will enjoy a discount of 2% at minimum.

“Given the 2.7% weight of electricity in the overall Consumer Price Index basket, this initiative is estimated to ease inflation by another 0.2 percentage point,” RAM Ratings said.

Previously, the ratings agency had envisaged the inflation rate to come in at an average of 0.7% for 2020, as opposed to its earlier projection of 1.7%.

However, it anticipated the forecast to shift lower as the overall outlook on inflation becomes significantly dovish amid the plunge in global oil prices.

West Texas Intermediate crude fell to a 20-year low of US$15 per barrel yesterday as demand remained low due to Covid-19, although Brent crude hovered around the US$27 mark as at press time.

According to Minister in the Prime Minister’s Department (Economic Affairs) Datuk Seri Mustapa Mohamed (picture), Malaysia has agreed to cut its crude oil production by 136,000 bpd for May and June.