Malaysia records positive inflation, OPR expected to remain unchanged

The uptick is attributable to higher prices of fuel, selected food items, alcoholic beverages, among others


MALAYSIA’S headline inflation returned to positive in February 2021 at 0.1% year-on-year (YoY) after 12 months of being in the negative territory.

The uptick is attributable to higher prices of fuel, selected food items, alcoholic beverages, and furnishing and household equipment amid the ongoing containment measures, as well as discounts on electricity bills during the month, UOB Global Economics and Market Research said.

“Transport price deflation narrowed further to -2% YoY in February (from -5.1% YoY in January) as fuel prices continued to track higher global oil prices.

“Key factors that kept the overall Transport Price Index in deflation territory were an extension of sales tax exemptions for passenger vehicles, restrictions on interstate travel (except through travel agencies), and continued international border closures to contain the spread of Covid-19 infections,” the firm noted.

On a month-on-month basis, Consumer Price Index rose 0.3% while year to date, headline inflation averaged -0.1% in the first two months of 2021 against an increase of 1.5% in the same period last year.

For the full year, UOB said Malaysia’s inflation is expected to average higher at a positive rate of 3% compared to -1.1% last year.

“This comes as the economy is expected to recover further following the rollout of vaccines and additional policy support, higher global commodity prices, and year-ago low base effects.

“In Bank Negara Malaysia’s (BNM) March monetary policy statement, BNM affirmed that headline inflation is anticipated to temporarily spike in the second quarter of 2021 (2Q21) due to the lower base from the low domestic retail fuel prices in the same period a year ago, before moderating thereafter. However, the outlook is subject to volatile global oil and commodity prices,” it said.

BNM projected Brent oil prices to hover between US$60 (RM247.77) and US$70 per barrel this year compared to last year’s average of US$43.21.

Upside risks to headline inflation is expected to be tempered by the extension of sales tax exemption for passenger vehicles and electricity bill discounts until end of June, as well as the reintroduction of price ceiling on petrol RON95 and diesel.

Despite the higher inflation outlook for the year, the firm said muted underlying demand price pressures are expected amid high unemployment rates to maintain the central bank’s monetary policy stance in neutral mode.

It also projected for the rate to remain at 1.75% for the rest of the year.

Meanwhile, Kenanga Investment Bank Bhd revised its 2021 headline inflation forecast to 1.8% from 1.4% on the expectation of higher commodity prices as vaccine-led recovery gathers pace.

It said the inflation rate is expected to continue to rise in the next few months, mainly due to the lower base of last year, higher retail fuel prices and unleashing of pent-up demand post-Movement Control Order (MCO) 2.0.

“In addition, Malaysia’s Covid-19 vaccination drive is seen to boost consumer’s consumption and push inflation higher.

“However, the ongoing pandemic could continue to pose downside risks to the inflation outlook as some of the Covid-19 measures are still in place and the domestic labour market is still weak,” it said in a note yesterday.

On the monetary front, BNM is expected to keep the Overnight Policy Rate (OPR) unchanged at 1.75% for the rest of 2021 on the back of positive economic outlook, given the loosening of Covid-19 restrictions, Pemerkasa’s (Strategic Programme to Empower the People and the Economy) RM20 billion stimulus package and Malaysia’s inoculation progress.

Nevertheless, it added that BNM still has room to reduce the OPR should the recovery pace weaken.

Kenanga said the headline inflation turned positive in February at 0.1% after eleven months of deflation, slightly below its expectation and the consensus at 0.2%.

“Despite facing the full brunt of MCO 2.0 in February, inflation rate climbed above zero for the first time since February 2020 on the back of rising global crude oil prices,” it said.