Malaysia: Lower July inflation numbers - ING

In view of Prakash Sakpal, Economist at ING, lower July inflation numbers of Malaysia will allow BNM to maintain the current policy stance over the rest of the year, but ING has revised their forecast of on-hold BNM in 2018 to one 25bp OPR hike in 2H18.

Key Quotes

“CPI inflation slowed more than expected to 3.2% YoY in July from 3.6% in June (ING f and cons: 3.4%). As in recent months, the oil-related slowdown in domestic fuel prices continued to drag inflation lower. At 4.0% YoY YTD, inflation has almost doubled from 2.1% in 2016, of which food and transport have been the stand-out drivers.”

“While we expect supply shocks to consumer prices to remain muted, sustained strong domestic demand supported by an acceleration in employment and wage growth will continue to exert demand-side pull on prices over the rest of the year. But for now our 3.6% full-year 2017 inflation forecast appears on track. Bank Negara Malaysia, the central bank, forecasts 3-4% inflation this year.”

“Strong growth and still-elevated inflation may tip BNM towards the US Fed in tightening this year. The MYR underperformance relative to other Asian currencies this year, which is likely to persist due to tightening of offshore trading, and negative real interest rates are other reasons for the BNM to hike. However, we do not think BNM will want to risk hampering the current economic recovery ahead of general elections.”

“We believe BNM will see through strong growth and inflation data and remain on hold this year. However, we revise our forecast for 2018 from no move to one 25bp OPR hike in 2H18 on the view that lifting the political constraint on economic policy will allow the central bank to create some policy space to prepare for the next cyclical downturn.”