KUALA LUMPUR (May 24): Bank Negara Malaysia is expected to stand pat for the rest of this year and shrug off April’s lower-than-expected inflation print while watching the planned fuel subsidy cuts, economists said.

Latest data show that inflation remained benign while an earlier announcement by Prime Minister Datuk Seri Anwar Ibrahim on the targeting of diesel subsidies is bereft of details on when and how the diesel subsidy rationalisation will be implemented, including the pricing, the economists said.

The base case is for the overnight policy rate (OPR) to stay at 3% for the rest of this year, OCBC said in a note. “The government is keen to keep the inflationary impact in check” though rate increases may be back on the table if price pressures become “more persistent and pervasive”, it cautioned.

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April's consumer price index (CPI) - Malaysia’s main gauge of inflation - rose 1.8% from a year earlier, which was slower than the median 1.9% estimate by a Bloomberg poll of economists. The rate has also remained unchanged for three straight months.

Core inflation, which measures domestic-driven inflation by excluding volatile fresh food and other price-administered items, came in at 1.9% in April, faster than March’s 1.7% pace.

On Tuesday, Anwar said the Cabinet has agreed to withdraw fuel subsidies starting with diesel, and only involve consumers in Peninsular Malaysia. The government will provide diesel subsidies for select commercial vehicles as well as cash handouts for eligible individual owners of diesel vehicles.

MIDF Amanah Investment Bank speculates that the targeted fuel subsidy may be implemented in the final quarter of 2024. “We postulate that the government may require more time to harness the subsidy distribution and fuel price mechanisms,” the research house said.

“We believe the food inflation rate may stay on an uptick direction following expected roll-out of targeted-diesel subsidy,” MIDF said.

Nevertheless, the direct impact is likely to be minimal given that diesel carries just 0.2% weight in overall CPI, said United Overseas Bank. The indirect, pass-through impact, however, should be watched as higher diesel prices will raise logistic costs and cause a “ripple effect on consumer prices”, the research house flagged.

For now, OPR is expected to be left unchanged at 3% until the end of 2024 as inflation risks are still tilted to the upside while economic growth momentum faces challenges, it added. 

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