Economic Highlights (Malaysia) - 17/04/2014

Inflation Remained Stable At 3.5% Y-o-Y In March, BNM Likely To Maintain Key Policy Rate For Now

¨      The headline inflation rate remained stable at 3.5% y-o-y in March, unchanged from the previous month and compared with +3.4% in January, as the effect of subsidy rationalisation measures by the Government continued to spill over to other products and services. The situation was made worse by the power tariff hike that came into effect on 1 January.

¨      Going forward, we expect inflation to stay elevated for another few months due to a change in administrative pricing by the Government. As a result, we expect inflation to trend up to an average rate of around 3.0-3.4% in 2014, from +2.1% in 2013, after factoring in another round of fuel prices hike. Further out, inflation is set to accelerate to 3.5-4.0% in 2015, the highest since 2008, when the 6.0% GST is implemented on 1 April 2015.

¨      Given the nature of the factors behind the increase in inflation, the Central Bank reiterated that monetary policy is not the best policy tool to manage the situation in its recent annual report. Although the Central Bank appears unperturbed by rising inflation, we believe it is still important for the Central Bank to take a preemptive move to control rising inflationary expectations and given that inflation will be accelerating again and for two consecutive years in 2014-15, after a pick-up in 2013. As a whole, we expect the Central Bank to increase its Overnight Policy Rate (OPR) by 25 basis points toward late 3Q 2014 to 3.25%, after keeping it unchanged at 3.0% for more than two years.

Link to the report:  Inflation Remained Stable At 3.5% Y-o-Y In March, BNM Likely To Maintain Key Policy Rate For Now

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