Underlying inflation is projected to remain subdued amid continued spare capacity in the economy

by ASILA JALIL /Pic by MUHD AMIN NAHARUL

BANK Negara Malaysia (BNM) is expected to maintain the Overnight Policy Rate (OPR) at its current level of 1.75% as the current rise in inflationary pressure will likely be temporary.

The central bank had predicted a spike in headline inflation in the second quarter of 2021 (2Q21), though experts believe the environment is not as critical to push BNM to respond just yet.

MIDF Amanah Investment Bank Bhd economist Mazlina Abdul Rahman said despite a surge in headline figure, underlying inflation is projected to remain subdued amid continued spare capacity in the economy, which is expected to average between 0.5% and 1.5% this year based on BNM’s forecast.

“In addition, the economic recovery pace seems to be uneven and there are still several downside risks to the economic outlook for this year despite the ongoing vaccination programme.

“Unfavourable news and rumours on vaccination, if not properly managed, could deteriorate the rakyat’s confidence and eventually affect the government’s herd immunity target,” she told The Malaysian Reserve (TMR).

She said consumer headline inflation jumped to 1.7% in March, the highest rate since January 2018, mainly due to low base effect last year resulting from domestic fuel prices, which were reflected in the transport component. Transport prices rebounded by 9.8% the same month from -2% in February. Rise in food prices also contributed to the overall inflation for the month.

“Inflationary pressure is expected to continue surging going into 2Q21, where the low base effect will be more evident

At the current price limit of RM2.05 for RON95, it is already more than 50% higher than the average price of RON95 recorded for April to May 2020,” she said.

BNM’s Monetary Policy Committee (MPC) is scheduled to make an announcement on the benchmark lending rate on Thursday. The OPR has remained at 1.75% since July 7 last year.

Bank Islam Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid also expects BNM to maintain the OPR at 1.75% and retain an accommodative monetary stand despite expectations of higher inflation in the immediate term.

“Higher inflation is very much driven by fuel prices and the low base effect from last year. In that sense, there is no urgency to raise the OPR in the immediate term, especially when demand condition is still soft,” he told TMR.

He said there is, however, a possibility for the central bank to raise the rate next year to boost the country’s recovery from the impact of the Covid-19 pandemic.

“It will be data dependent and given the downside risks are still visible, they may want to keep the OPR steady to facilitate the recovery process,” he said.

Mazlina said any decision by BNM to tighten monetary policy will likely be more appropriate next year when the overall economy starts to normalise.

“As of now, the economic projections for this year do not suggest a recovery back to pre-pandemic levels just yet. Hence, we believe BNM’s current stance on the interest rate will remain accommodative for the economy,” she said.