Malaysia to grapple with stubbornly high inflation in 2016

Inflation will stay above 3% in the first half.

Inflation in Malaysia is expected to remain high in coming months, on back of a sharply lower base effect from last year and the lingering effects of depressed oil prices.

According to DBS, although the slump in oil prices has caused consumer costs to drop in many regional countries, the case is not quite the same in Malaysia.

“Second order price effects from the introduction of the GST as well as higher imported inflation arising from the weak local currency are probably the reasons behind the elevated CPI figure. And with a bit of low base effect in the coming months, headline CPI inflation will likely stay stubbornly above the 3% level in the first half of 2016,” said DBS.

However, the elevated inflation figure is purely technical and transient in nature, DBS said. Inflation is expected to ease going into 2H16, but will still deliver a full year average inflation of 2.8%, up from a projected 2.1% for 2015.

“With growth momentum easing and inflation set to be higher, monetary policy will have to track the middle ground. That is, Bank Negara will continue to maintain a stable monetary policy stance. The central bank is expected to keep the Overnight Policy Rate (OPR) at 3.25% for the whole of 2016,” said DBS.

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