KUALA LUMPUR (June 25): Inflation in Malaysia will likely pick up in the months ahead above 2% following announced and planned changes in administered prices amid persistent global pressure.

Several items are up for review and may cost more, posing risk to near-term inflation outlook, United Overseas Bank (UOB) said in a note. That includes electricity tariffs for July-December 2024, the ceiling price of local white rice by October and other essential items such as sugar, the research house said.

“The risks to the near-term inflation outlook remain tilted to the upside as several price-administered items are due for review and prone to a price hike,” UOB said.

In May, Malaysia’s consumer prices rose at a slightly faster-than-expected pace, reaching 2.0% — the highest rate in nine months. This increase was primarily driven by higher utility bills, although food inflation decelerated.

Most recently, the government floated retail diesel prices in Peninsular Malaysia. The current price per litre stands at RM3.35, up from RM2.15 fixed previously. The subsidy rationalisation for RON95, the most widely-used petrol variant currently capped at RM2.05 per litre, is expected to follow suit.

The higher retail diesel prices will exert some upside pressure on inflation in the coming months, lifting the inflation rate to 2.3% in June, according to OCBC. For the full year, inflation will likely average 2.5%, the research house said.

“The diesel subsidy rationalisation suggests that inflationary pressures will remain contained” and add 0.1 percentage point to the annual inflation rate, OCBC said.

RHB Bank believes that petrol subsidy rationalisation might be delayed to end-2024 at the earliest. “The government might assess the lagged impact of diesel prices adjustments on the inflation trajectory and the economy, prior to the implementation of petrol subsidy rationalisation,” the house said.

Every 1% increase in RON95’s retail price could potentially raise headline inflation by 0.05 percentage point, while a free float of RON95 petrol could potentially contribute to a 3.05 percentage point upside in inflation based on current prices, RHB flagged.

“We view that the retargeting of the RON95 subsidy might take form in a more gradual approach” as it involves a larger consumer base with a significant weightage of 5.5% in the CPI basket versus diesel at 0.2%, RHB added.

The official forecast calls for a headline inflation rate of 2% to 3.5% in 2024, versus 2.5% in 2023, and for core inflation — which measures domestic-driven inflation by excluding volatile items and other price-administered items — to range 2% to 3% against the 3% average in 2023.

All three research houses expect Bank Negara Malaysia to maintain the overnight policy rate at 3.00% for the rest of 2024 as the central bank closely watches the government’s subsidy rationalisation.

BNM has kept the benchmark rate unchanged since it was last raised in May 2023 by 25 basis points.