In a note today, the investment bank said although headline inflation had exhibited a downward trajectory in recent months, primarily driven by the tempering of various cost factors, core inflation – which excludes food and energy prices – is poised to persist at elevated levels due to the robust state of demand condition.
“The continued implementation of price controls and fuel subsidies will serve as partial mitigating factors, curbing the extent of inflationary pressures.
“(Nonetheless,) it is essential to acknowledge that the inflation outlook carries a notable risk bias toward the upside, remaining acutely vulnerable to potential shifts in domestic policies pertaining to subsidies and price controls as well as developments within financial markets and global commodity prices,” it said.
PIVB noted that without petrol subsidies, it is estimated that the actual price of RON95 would reach approximately RM3.22 per litre compared to the present RM2.05 per litre.
“We believe that the subsidy ceiling for RON 95 and diesel, set at RM2.05 and RM2.15 per litre respectively, may be subject to review and gradually increased in the latter part of the year,” it said.
Deputy finance minister Ahmad Maslan reportedly said on May 19 that the T20 group earners will no longer enjoy benefits meant for lower and middle-income earners with the implementation of targeted fuel subsidies for RON95 petrol and diesel next year.
Last Friday, the statistics department revealed that the consumer price index grew at a slower pace of 3.3% year-on-year (y-o-y) in April 2023 from 3.4% y-o-y in March 2023, while core inflation also slowed to 3.6% y-o-y in April 2023 versus 3.8% in the previous month.
Moving forward, PIVB anticipated that headline inflation in the country is likely to average between 3% and 3.5% in 2023 against Bank Negara Malaysia (BNM) and the finance ministry’s forecast of 2.8%-3.8%, with the caveat that any amendments to the cap on retail oil prices or implementation of price control measures may affect its projection.
On the overnight policy rate (OPR) adjustment, the investment bank anticipated that BNM would adopt a wait-and-see approach, particularly with regard to the monitoring of significant central bank developments.
“Should Malaysia’s domestic economy surpass expectations, it is not inconceivable that BNM may seek to optimise its monetary arsenal by normalising statutory reserve requirement (SRR) from the current rate of 2% to 3% in the first half of 2024,” it said.
The central bank has increased the OPR by 25 basis points to 3% at its May 2-3 monetary policy committee meeting.