KUALA LUMPUR (March 29): Bank Negara Malaysia (BNM) has projected Malaysia’s headline and core inflation to average between 2.8% and 3.8% in 2023.  

In 2022, full-year headline inflation averaged 3.3%, while core inflation averaged 3%.

“The continued strength in domestic demand and improvement in the labour market will keep core inflation elevated in the near term. The elevated core inflation will trend above headline inflation for a few months in 2023. In addition, gradual subsidy rationalisation effort will also contribute to some upward impact to inflation,” the central bank said in its Economic and Monetary Review 2022 report.

The central bank said the outlook for inflation in 2023 is highly uncertain, with risks tilted to the upside.

“Global commodity prices, one of the major causes for the rise in domestic inflation in 2022, could again drive inflation higher should the geopolitical conflict in Ukraine worsen,” it said.

Upside risks to inflation, it added, also stem from extreme weather conditions, stronger-than-expected demand from China, and higher input costs due to developments in global financial markets.

“The extent of inflationary pressures also continues to be highly subject to any changes to domestic policy on subsidies and price controls,” it further added.

Amid prolonged cost pressures throughout the past two years, BNM said prices going forward may continue to catch up to the significant cost increases that had already happened, which could cause greater persistence in inflation and delay the reversion of inflation to its long-term average.

The expectations of stronger persistence may in turn affect employees’ wage-bargaining and firms’ price-setting decisions, which will drive additional rise in general price pressures, the central bank noted.

Currently, however, the risk of a wage-price spiral is assessed to be remote, with long-term inflation expectations remaining well anchored. Furthermore, wage growth is not estimated to outpace productivity growth.

However, BNM said downside risks to inflation stem primarily from more subdued global commodity prices given the environment of weaker global growth.

On the domestic front, BNM said if pent-up demand that had in part supported household spending in 2022 dissipates at a faster rate, inflationary pressures may abate. 

https://www.theedgemarkets.com/node/661205