OVERVIEW

In April, the Consumer Price Index (CPI) growth persisted at 1.8% YoY, maintaining the same rate observed in March and aligning with market expectations. However, core inflation, which excludes volatile and administered price elements, rose to 1.9%, up from 1.7% in March.

According to BNM, Malaysia's 2024 inflation outlook remains moderate, with headline and core inflation projected between 2.0% to 3.5% and 2.0% to 3.0%, respectively. This forecast depends on effective subsidy and price control policies, as well as global commodity price and financial market volatility. Despite limited impacts from tax and tariff hikes, planned diesel subsidy cuts and a significant civil servant salary hike may introduce inflationary pressures. These factors present upside risks to Bank Negara Malaysia’s (BNM) Overnight Policy Rate (OPR) outlook. However, we maintain our forecast that BNM will hold the policy rate steady at 3% throughout 2024.

Restaurant and accommodation services costs led the growth in headline inflation

The April CPI growth remained steady at 1.8% YoY, partially reflecting the impact of high base effects, which we believe are gradually diminishing. This increase in April was primarily driven by gains in the restaurant and accommodation services category, which rose by 3.5% (March: 3.0%), personal care, social protection, and miscellaneous goods and services at 3.1% (March: 2.6%), and housing, water, electricity, gas, and other fuels at 3.0% (March: 3.0%). Transport inflation eased to 0.8% in April, down from 1.3% in March. Notably, the average price of unleaded petrol RON97 surged by 3.6% to RM3.47 per litre in April, up from RM3.35 per litre in April 2023, amid a 7.1% increase in Brent crude oil prices to US$90.05 per barrel in April.

The core inflation rate, which excludes volatile and administered price items, rose to 1.9% YoY in April, up from 1.7% in March. This increase was predominantly driven by the restaurant & accommodation services and food & beverages categories, which saw gains of 3.5% and 3.2%, respectively. Other significant contributors included personal care, social protection & miscellaneous goods & services at 3.1%, health at 2.4%, and both transport and recreation, sport & culture, each increasing by 2.0%. Excluding fuel for vehicles (RON95, RON97 and diesel), the inflation rate inclined to 1.9% YoY in April.

Only four states registered CPI readings higher than the national average of 1.8% in April, namely Pulau Pinang (3.2%), Sarawak (2.8%), Pahang (2.4%) and Selangor (2.2%). High F&B costs remained a drag in the following states— Selangor at 3.7%, followed by Pulau Pinang (3.1%), Wilayah Persekutuan Putrajaya (2.9%) and Sarawak (2.1%). Other states showed an increase below the national inflation of F&B costs of 2% YoY in April.

Navigating Malaysia’s inflation tightrope

Looking ahead, inflation in 2024 is expected to follow a moderate path, driven by stable demand dynamics and subdued cost pressures. The inflation outlook is heavily contingent on the effective implementation of domestic policies regarding subsidies and price controls, along with the volatility of global commodity prices and financial market developments. Nonetheless, the pass- through effects of the services tax hike and water tariff increase appear limited, thus minimally impacting overall inflation.

BNM’s projections, following a thorough evaluation of the potential impacts of subsidy rationalization, indicate that both headline and core inflation will range between 2.0% to 3.5% and 2.0% to 3.0%, respectively, throughout the year (PIVB: +3.0%, 2023: 2.5%).

In a recent televised address, Prime Minister Anwar Ibrahim announced the cabinet's approval of diesel subsidy cuts, projected to save RM4bn annually, approximately 6% of last year's total subsidy spending. Exemptions for Sabah, Sarawak, and commercial vehicles aim to mitigate inflation and cost-of-living impacts on lower-income households, resulting in a two-tier diesel pricing structure. Although the implementation details remain unspecified, this announcement aligns with prior guidance. We anticipate a swift rollout to prevent stockpiling ahead of price hikes.

Furthermore, with a renewed focus on fiscal targets, the introduction of targeted RON95 subsidies in 2H24 appears likely. Nonetheless, the announced civil servant salary hike exceeding 13%, totalling around RM10bn, may hinder fiscal goals and intensify inflationary pressures by escalating wage demands across the private sector, potentially increasing production costs and prices. The launch of EPF Account 3, injecting approximately RM30bn into consumer spending, could counteract slow global growth and rising living costs from subsidy rationalization. Nevertheless, this spending surge might also drive demand-pull inflation.

These factors present upside risks to BNM’s OPR outlook. However, we maintain our forecast that BNM will hold the policy rate steady at 3% throughout 2024, despite global trends towards rate cuts. The robust inflationary and economic indicators emerging from the US suggest a potential deceleration or moderation in the Federal Reserve's rate cuts. This development is likely to bolster the USD, consequently placing depreciation pressure on the ringgit. Such external monetary conditions could further exert upward pressure on OPR.

Source: PublicInvest Research - 27 May 2024