The moderation in inflation is attributed to a favourable exchange rate with the bank anticipating the ringgit to strengthen to RM4.28 against the US dollar by year end.
The moderation also aligns with Bank Islam’s expectation that the overnight policy rate (OPR) will be raised 50 bps in Q1 2023 to a terminal rate of 3.25%.
Bank Islam chief economist Firdaos Rosli said inflation rates will still be contentious and could trend above the 3% baseline if subsidy rationalisation occurs in 2023 as retail prices increase.
The consumer price index (CPI) is forecast to increase by 0.42% above the baseline for every 10 sen increase in the price of RON95 petrol. “The latest CPI print may have peaked, but overall prices will likely remain elevated.
“Inflation is unlikely to spike and peak above 4.7%, unless a second major supply shock occurs later this year,” said Firdaos.
Other major influences to price stability will be the government’s plans – such as the possibility of targeted subsidies – that have yet to be unveiled in Budget 2023.
Growth and uncertainty
Despite lower growth forecasts for 2023 and headwinds from major economies, growth in the tourism and services sector, and China’s economic reopening will help soften the blow.
Bank Islam projects GDP growth for 2023 to moderate to 4.5%, more than half their expectation for FY2022 at 8.1%. However, the figure is still slightly more bullish than projections from the World Bank (4%) and the Asian Development Bank (4.3%).
All eyes are on the government’s upcoming public expenditure review and the tabling of the Fiscal Responsibility Act in addition to the new budget, to provide clarity for their strategy in 2023.
A mid-term review of the 12th Malaysia Plan (12MP) will also be a point of interest this year. The review’s purpose is to monitor progress towards the initial targets, and see if any need to be revised.
“The lack of common policy framework among the coalition parties may pose a challenge in determining what fiscal indicators should be the priority,” the bank said.
It also expects to see state elections for Kedah, Penang, Selangor, Negeri Sembilan, Kelantan and Terengganu to be held in Q2 2022, without too much concern for political instability owing to the two-thirds majority held by the unity government.