RHB Investment Bank Bhd (RHB IB) does not think so and has maintained its 2023 peak OPR forecast at 3.25% versus the current 2.75% despite the easing consumer price index (CPI) in March.
This opens the possibility of at least two more 25-basis point (bps) hikes by BNM’s Monetary Policy Committee (MPC) this year.
BNM had paused its OPR hiking cycle at its last two MPC meetings following four consecutive 25bps increases last year in a bid to tame inflation and keep pace with the US Federal Reserve’s aggressive interest rate hikes.
In a note on Thursday, RHB IB said it took this view based on “persistent core inflationary pressures”, the nominal effective exchange rate on a steep downward trajectory, and the resilient domestic economy.
The department of statistics Malaysia (DoSM) announced on Thursday that the March CPI eased to 3.4% from 3.7% in February due to a decrease in RON97 petrol price, which slowed inflation in the transport group to 2.4%.
DoSM said core inflation, which measures changes in the prices of all goods and services but excludes food and government-subsidised goods, rose 3.8% in March against 3.9% in February.
RHB IB noted that robust domestic demand coupled with prolonged low-interest rates would “continue to fuel core inflation pressures” in the next few months.
“The balance of risk to the inflation outlook is tilted to the upside, driven by changes to the blanket fuel and food subsidies mechanism, global commodity price developments and risks from supply-related disruptions,” the investment bank said.
It remains watchful of potential domestic policy developments with a focus on electricity tariffs and fuel subsidies and subsidies for chicken breeders and egg producers.
RHB IB retained its 2023 headline inflation forecast at 3% with core inflation projected at 3.5%.
Window closing for rate hikes
Bank Muamalat chief economist and social finance head Afzanizam Rashid said while the inflation rate has demonstrated a moderating trend, it is still deemed high by historical standards.
The average headline inflation has stood at 2.2% since 2006, he pointed out.
Apart from that, he said, Malaysia’s overdependence on food import suggests the weakening of the ringgit would be effectively transmitted to the local prices, leading to an overall increase.
“We stick to our call for 3.6% inflation rate in 2023 as we believe food inflation will stay elevated along with possible changes in government policies on subsidies (fuel and electricity) in the H2 2023,” he said in the bank’s latest Macro Insights report.
Afzanizam also said the bank believes the window for possible increment in the OPR is closing as the “external front has become quite wobbly”, which would seep into Malaysia’s external sector.
“For now, exports have been quite decent despite recording 1.4% year-on-year (February 2023: 9.8%) contraction in March. This was predicated on the sequential gain of 15.5% month-on-month after posting two consecutive months of declines,” he said, adding the bank expects export growth will endure “a challenging prospect” in the second half of 2023.
Meanwhile, AmBank Group has revised upwards its forecast of Malaysia’s 2023 inflation in the range of 3%–3.5 % from the previous estimate of 3%.
“Headline inflation eased in March 2023, bringing the first quarter 2023 (Q1 2023) inflation at 3.6%. We now expect inflation to be higher than what we have previously forecasted,” it said in an investment note.
AmBank Group said the base case now assumed that the electricity tariff, diesel prices, and price ceiling for chicken and eggs to be gradually removed in the second half of 2023, as guided by the recent announcements.
Inflation rate to normalise?
On the other hand, MIDF Research has maintained its 2023 headline inflation forecast at 2.5%.
It noted that headline inflation has moderated to a nine-month low, falling to 3.4% y-o-y in March, lower than market estimates of 3.6% y-o-y.
Moving further into 2023, the research house said supply-push factors are expected to ease, among others, attributable to the ringgit’s appreciation, mild correction in global commodity prices, and better supply chain flows.
“Judging from the re-tabled Budget 2023, we believe the government will keep fuel subsidies, especially RON95 status quo, until the end of the year. We anticipate that any targeted-subsidy measures for RON95 and diesel will be rolled out in 2024,” it said.
It added that the main downside risks to Malaysia’s inflation are persistent high food inflation, heightened geopolitical conflict in the European Union, spike of commodity prices, weak ringgit and natural disaster impacts that could negatively affect the trajectory of food prices in Malaysia.