Lower inflation forecast for Malaysia

It is said to be the country with the best inflation profile right now.

DBS Group Research said:

Lower inflation is expected in today’s announcement for May CPI reading. What more can one ask from a country with the best inflation profile right now. A 1.7% YoY rise in inflation has been penciled into our forecast, from 1.9% previously.

Moreover, our estimation shows that inflation will bottom at about 1.5-1.6% in June before it starts to inch back up to 2.0% by the end of the year.

Plainly, with the persistent downside risks on growth prospects in the external environment, a resilient domestic demand is perhaps the only factor that is supporting inflationary pressure in Malaysia. Inflation would have been significantly lower if not for the fact that the domestic economic conditions have remained fairly sanguine.

In addition, pickup in domestic inflationary pressure can be expected come the Ramadan festive season in July but apart from that, full year inflation should average 2.0%.

While a benign inflation outlook may provide room for Bank Negara to ease off on its monetary policy, the authority’s hands are tied. A lower interest rate will further exacerbate an already unhealthy household debt to GDP ratio, which currently stands at 77%.

Moreover, output gap has turned positive recently, reflecting a gradual buildup in domestic inflationary pressure. Unless a global recession occurs, expect the central bank to maintain the Overnight Policy Rate at 3.00% despite an easing inflation and slowing growth momentum.

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