Malaysian inflation isn’t misbehaving, central banker says

Malaysia’s inflation currently isn’t misbehaving, giving the central bank room to keep up its “conditional pause,” according to a senior official.

“If it’s food prices and all the supply shocks, we have a history of seeing through those shocks,” Bank Negara Malaysia’s Assistant Governor Fraziali Ismail (picture) said in an interview with Bloomberg Television’s Haslinda Amin on Thursday. “What matters is how it stokes demand. At this juncture, again, we don’t see for inflation to misbehave in Malaysia.”

When asked if there is a case to continue hiking rates, Fraziali said “that depends on how inflation behaves.” Fraziali, who’s worked at the central bank for almost three decades, reiterated the central bank’s 2023 average inflation forecast of between 2.8% and 3.8% in the interview in Kuala Lumpur.

“What we have seen so far, I’ve mentioned earlier, inflation was a function of both supply and demand,” Fraziali said. “We have seen, for example, demand-driven inflation staying quite strong at this juncture. We don’t have an inflation problem.”

Easing inflation will give the BNM scope to ease monetary policy should the economy lose momentum. Consumer prices rose 3.3% in April from a year earlier, the slowest pace in 11 months.

While inflation has mostly moderated, boosting market bets that borrowing costs in the region have peaked, price growth is still proving persistent in some places. Canada delivered a surprise interest-rate hike Wednesday, and earlier this week Australia unexpectedly increased the key rate for a second straight meeting and kept the door open for more hikes.

Malaysia’s central bank has delivered five rate increases in the past year, with a surprise hike early last month bringing borrowing costs back to pre-pandemic levels. Policymakers warned then that inflation may flare up again, with commodity prices and an adjustment in subsidies among the factors to watch. 

“Many central banks have taken the step, us included, to have an intermittent pause, to reevaluate what has been the effects of our measures on the economy,” said Fraziali, who also sits on BNM’s monetary policy committee. “In a way, when we do a conditional pause, let me stress it is a conditional pause — it depends on incoming data as well.”

A policy pause in Malaysia will offer the economy some relief as analysts predict that the pace of expansion will slow to 4.2% this year from 8.7% in 2022. Traders think the rate-hike cycle has ended, with ringgit one-year, one-day swaps reflecting bets that the BNM will stand pat over the next 12 months.

Still, an impending reduction in subsidies may rekindle price pressures, and Fraziali noted inflation depends on subsidy timing. Moody’s Investors Service has warned that a heat wave could translate into faster food inflation and another interest-rate hike. –BLOOMBERG