Economists who spoke to FMT Business this week said inflation will hover within the 3% to 3.5% range this year, up from 2.5% in 2023, and this will likely prompt Bank Negara Malaysia (BNM) to keep rates steady.
Yeah Kim Leng, economics professor at Sunway Business School, said the fuel subsidy rationalisation and increase in tariffs on various essentials will push the consumer price index (CPI) up to 3% this year.
However, he expects interest rates to drop once inflation comes below the trend line “for a prolonged period”. He does not expect this to happen in 2024.
BNM’s monetary policy committee (MPC) is currently in session, its first for 2024. This is when it decides whether or not to raise the overnight policy rate (OPR), reduce or maintain it at the current level of 3%.
An announcement is expected to be made later today.
A change in the OPR will have an impact on the cost of borrowings and returns on savings.
BNM last raised the OPR, from 2.75% to 3%, in May last year. The central bank cited “a need to normalise monetary accommodation” for its decision in the face of a resilient economy as well as the need to manage persistent inflation.
The OPR was reduced from 2% to 1.75%, its lowest ever, in July 2020 when the Covid-19 pandemic began to take a hold on the globe.
It was raised incrementally to its current level at subsequent meetings of the monetary policy committee. The committee meets six times a year when it decides on whether or not to maintain, raise or reduce the OPR.
Yeah said inflationary pressure will likely rise this year but it will remain at a manageable level given that the CPI is starting from a low base of 1.5%.
He said the expected rise in transportation costs led by an increase in oil prices as well as the need for shipping to go around the Cape of Good Hope to avoid the Middle East conflict and the blockade of the Suez Canal will lead to economic uncertainties.
“Although it will not be an immediate shock, we can expect price pressures to creep in,” he added.
Universiti Teknologi Mara senior lecturer Firdausi Suffian said that with subsidy rationalisation and the implementation of the progressive wage model, inflation will likely rise to 3% this year.
Data from the statistics department shows that the inflation rate was 1.5% and core inflation was 1.9% in December 2023. The annual inflation rate was 2.5%, down from 3.3% in 2022.
Affin Hwang Investment Bank chief economist Alan Tan, who expects the inflation rate to rise as high as 3.5% this year, said BNM is likely to keep the OPR unchanged to align with its projections for both inflation and economic growth outlook.
He expects the impact of subsidy rationalisation on inflation to be “gradual”.
A total of 24 out of 28 economists who participated in a Jan 12-18 Reuters poll agreed that the OPR will remain at 3% at least until 2025 on rising price pressures and steady growth.
Only four of them expect at least one rate cut this year.
Reuters also quoted KAF Research senior economist Vincent Loo as saying that moves such as the 2% increase in the sales and service tax (SST) to 8% from March, the subsidy rationalisation and the implementation of the luxury goods tax at 5% to 10% are likely to see inflation “creep up”.
The report said inflation is likely to rise to 2.5% in 2024 before moderating marginally to 2.4% in 2025.