MARC expects Malaysia’s inflation to peak at 4%, before easing in 4Q22


MARC Ratings Bhd predicts the country’s inflation to accelerate in the coming months, in tandem with Bank Negara Malaysia’s (BNM) view on rising inflation in the country.

The rating firm believes that the inflation rate will peak at 4% before easing in the late fourth quarter of 2022 (4Q22).

MARC stated while BNM has maintained its projection for inflation between 2.2% and 3.2% this year, it did note that headline inflation may be higher in some months mainly due to the base effect from electricity prices.  

“This is also premised on an additional inflation impulse from the recent increase in ceiling prices and the removal of subsidies for key food items.

“High price pressure in producer stages, as evidenced by the double-digit growth in producer prices, suggests continued upside risks for inflation,” it said in a statement today.

According to MARC, prospects of higher interest rates externally, the weakened ringgit and rising inflation risks will keep the central bank on a monetary tightening path.  

It said however, the pace of the tightening will be gradual and measured as reiterated in the Monetary Policy Committee’s (MPC) statement, to avoid a severe demand shock.  

Consequently, the rating agency expects the ongoing consecutive rate hike to continue to 2.75% by year end, so long as the rate gap is a concern.

After delivering a 25 basis points (bps) hike in May, the first in more than four years, BNM followed up with another 25bps increase in the Overnight Policy Rate (OPR) to 2.25% at its MPC meeting on July 6.

MARC noted that the OPR hike had been widely expected as BNM had signalled policy normalisation amid widened rate differential between the US and Malaysia.

However, it stressed that the current OPR remains 75bps below the pre-pandemic level and is still supportive of economic growth.  

The real interest rate is still in the negative territory, suggesting ample space for tightening when inflation is no longer transitory.

Meanwhile, MARC also said growth headwinds emanating from the Covid-19 pandemic have dissipated considerably.  

“However, as the output gap remains negative, the rising borrowing cost calls for higher fiscal support to achieve the official GDP growth estimates of 5.3% to 6.3%.

“As it stands, we maintain our 2022 GDP growth forecast at 5.5%,” it noted.

Additionally, MARC highlighted that the central bank has retained its relatively sanguine assessment of the domestic economy.  

The rating agency said the MPC statement has cited the upbeat exports and retail spending indicators, as well as improving labour market conditions following the reopening of economic sectors, a higher minimum wage and income support.  

It added that the central bank also expected the realisation of multi-year projects to support investment activity.

This is notwithstanding its words of caution on the moderating external demand that would add to growth risks.

That said, MARC noted that a global slowdown will not necessarily lead to a looming recession for Malaysia in the immediate term.  

“This outlook is especially true when China, Malaysia’s largest trading partner, is seemingly moving away from its zero-Covid strategy,” it said.