In its Economic and Monetary Review 2023 report released today, BNM said headline inflation is expected to average between 2% and 3.5% in 2024 from 2.5% in 2023.

Core inflation, which strips out volatile items and other price-administered items, was projected to come in at 2%-3% from 3% in 2023, BNM said. “That is above its long-term average amid expanding domestic demand and further expected increases in wages.

“Inflation outlook remains highly subject to upside risks due to potential price adjustments on food and energy items, as well as external pressures from exchange rate and global commodity price developments,” said BNM.

The central bank acknowledged the inflation forecast range incorporated some “potential upside from the implementation of fuel subsidy rationalisation”, adding it expects the impact of price pressures from such a move to last for about a year.

The government has announced it plans to withdraw blanket subsidies for fuel later this year to improve its finances, and to channel the savings to the groups that need assistance. It has also scrapped subsidies for sugar while raising electricity tariffs for heavy users, and increased the sales and service tax (SST) to 8% from 6%.

Upside risks for inflation

BNM said the upside risks for inflation include external drivers such as geopolitical tensions and weather disruptions impacting global commodity prices as well as changes in domestic policies related to subsidies and price controls.

While the rationalisation of subsidies may have short-term implications on growth and inflation, well-planned and well executed implementation strategies alongside targeted cash assistance can help mitigate these effects.

“In the context of supply shock scenarios, such as those linked to subsidy rationalisation, it is crucial to differentiate between short-term impacts and potential longer term effects on inflation and growth,” it said.

When relative price adjustments are transitory and likely to normalise over a reasonable period of time, it may not require a monetary policy response, it added.

“On the other hand, there may arise circumstances that necessitate monetary policy action to ensure that the medium-term prospects for price stability and sustainable growth are not jeopardised,” it said.

This could happen when price increases become noticeably pervasive and persistent. “Persistently higher inflation in these instances will create more uncertainty and further erode purchasing power. This will subsequently affect consumption and investment growth,” it added.