Malaysia's May inflation predicted to hover in high sky

Forecast is pegged at 3.3%.

According to DBS, CPI inflation for May14 will remain high. The headline number will likely print 3.3% YoY, just marginally below the 3.4% reading in the previous month.

This is still significantly higher than the inflation rate recorded in the same period last year (1.8% in May13). A cut back in fuel subsidies in September last year, which resulted in higher pump prices, is the main reason behind the rapid increase in CPI inflation.

Here's more from DBS:

Though the concern is that retailers may jack up prices in anticipation of even higher costs ahead, the headline YoY number will probably ease off when the low base effect lapses later this year.

More importantly, the central bank is also concerned about domestic financial imbalances. Bank Negara mentioned in its statement that “while the macro and micro prudential measures have had a moderating impact on the growth of household indebtedness, the current monetary and financial conditions could lead to a broader build up in economic and financial imbalances”.

Household debt to GDP ratio has already risen to an unhealthy level of 86.8% while the loan to GDP ratio is at multi-year high of 85.1%. In short, leverage has continued to rise while liquidity conditions within the domestic banking system remains tight. All these warrant a tighter monetary policy.

The next policy move is probably just round the corner. We expect the central bank to tighten monetary policy, hiking the overnight policy rate (OPR) by 50bps in 3Q14, thereby bringing the policy rate to 3.50% before the end of the year.

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