In a research note today, the investment bank said Budget 2022 was presented on the assumption of the average Brent crude oil price at US$66 per barrel this year.
“On a flip side, the cost of fuel subsidy is set to rise as the government is keeping retail fuel prices namely RON95 and diesel at RM2.05 and RM2.15 per litre at current juncture. We estimate actual price for RON95 would be above RM4 as Brent oil price tops US$100 per barrel,” it said.
Citing an example, the bank said the average RON95 price would be approximately RM4.77 per litre when Brent oil was priced at US$122.80 per barrel in May 2022.
“Our in-house forecast for Brent crude oil price is US$112.49 per barrel for 2022 and US$120.30 per barrel for 2023. Under the floating market mechanism, RON95 and diesel shall be priced at RM4.37 and RM4.67 per litre, respectively,” it said.
For 2023, the bank said its in-house Brent crude oil price forecast is at US$120.30 per barrel.
It said under this scenario, it hypothesised that the government might phase out the fuel subsidy mechanism progressively.
“The gradual subsidy reduction will allow consumers and businesses to slowly adjust and adapt as retail fuel price for RON95 will rise by 15 sen each month, starting from July 2022 until December 2023,” it said.
It said the normalisation of RON95 price would take about 18 months to complete. “The advantage of adopting the free floating pricing mechanism is more visible in the change of inflation particularly during the downtrend as we saw in 2020.
“While free floating mechanism is more efficient, it exposes Malaysia to inflationary pressure during an uptrend cycle,” it said.
Looking ahead, the bank said the price growth trajectory of food and fuel would be the main determinants for Malaysia’s overall inflation pressure, particularly during the current environment of elevated global commodity prices and supply chain disruptions.
“For other CPI components, we foresee less volatile price change for 2023 as we assume the price movement would follow a similar trend during the pre-pandemic period,” it said.
It said assuming RON95 price is up by 15 sen to RM2.20 per litre on July 1, 2022, fuel inflation is predicted to surge to 10.7% year-on-year and headline inflation to rise to 3.7% year-on-year, more than the one-year high in July.
“With this gradual approach, the overall inflation rate will stay on an upward trend and hover above the eight per cent level in the second half of 2023,” it said.
It said the price growth would reach its new peak at 8.7% year-on-year in June 2023. “For 2022 and 2023, headline inflation rate will average higher at 3.6% and 7.9%, respectively,” it added.