KUALA LUMPUR (April 25): While March’s headline inflation of 1.8% year-on-year (y-o-y) came in slightly lower than consensus expectations of 2%, economists are maintaining their projection that Malaysia's headline inflation will progressively accelerate towards the end of the year on account of the government's fuel subsidy rationalisation plan, utility tariff hikes, and its recent adjustments of the service tax.

UOB Global Economics & Markets Research said March's inflation print did not sway its view that headline inflation will trend up gradually towards year end.

The research house projects headline inflation to average 2.6% for the entire 2024, as opposed to Bank Negara Malaysia's forecast of between 2% and 3.5%. In 2023, headline inflation came in at 2.5%.

"Pending the detailed announcement of fuel subsidy removal, BNM expects a marginal impact from tax changes and utility tariff hikes on headline inflation.

"It [BNM] added that the effect of the ringgit's weakness on inflation would be contained by administered prices, and underlying inflation pressures would be confined by manageable demand pressures, stable sentiment and moderate wage growth that is accompanied by productivity gains," UOB said in a note on Thursday.

Similarly, RHB Global Economics & Market Strategy, which has a headline inflation projection of 3.3% for 2024, expects inflation momentum to gain pace in the second quarter of 2024, following adjustments in service tax and anticipated rollout of diesel subsidy rationalisation.

"According to our estimates, the proposed fiscal consolidation measures are projected to lift the headline inflation by 0.7-1.1%," it said.

RHB said it observed an upside to the inflation in the recent two months amid upward adjustments in water tariffs for domestic users in peninsular Malaysia and the Federal Territory of Labuan.

"Higher water tariffs have contributed to a 0.2% increase in overall headline inflation. Based on our in-house estimation, the upside to headline inflation could range between 0.02% and 0.05% for every 5% increase in water tariff," it said.

Meanwhile, OCBC Global Market Research pointed out that headline inflation averaged 1.7% y-o-y for the first quarter of 2024, below its baseline, suggesting that inflationary pressures remain benign.

"The main risk to inflation in the coming months will be the timing and mechanism of the government’s fuel subsidy rationalisation policies," it said.

As such, OCBC also maintained its 2024 average headline inflation forecast of 2.5%.

MIDF Research expects overall inflation rate to average at 3.2%, on the assumption that the targeted-fuel subsidy could be rolled out as early as June.

"We opine the government may introduce a managed-float price mechanism for RON95 and provide cash assistance to those eligible as guided by the Padu database.

"Thus, we may see non-food inflation to come in at 2.9% while better domestic supply and normalised global commodity prices shall push food inflation rate lower [to] 3.7% in 2024," it said.

All of the economists cited above also maintained their forecast for BNM to keep the overnight policy rate unchanged at 3% for the rest of the year.

Earlier on Thursday, the Department of Statistics Malaysia announced that the Consumer Price Index — Malaysia’s main gauge of inflation — rose 1.8% y-o-y as prices of healthcare and food rose at a slower pace.

The headline figure was a tad lower than the median 2% rise predicted in a Bloomberg survey of economists, and unchanged versus February’s 1.8% gain.

This came despite a higher service tax of 8% that took effect from March 1 and dissipating favourable base effects.

Key contributors to the lower-than-expected inflation were cheaper food and beverages, healthcare and recreation, and sports and culture services, which helped to counterbalance the price hike of alcoholic beverages, utilities, transport, restaurant services as well as jewelleries and watches.