Malaysia's inflation to hit 2%

Inflationary pressure has stayed benign.

According to DBS, it has lowered its inflation forecasts for 2013 and 2014 to 2.0% and 2.4% respectively.

Here's more:

These are down from our earlier estimates of 2.8% and 3.2%. Most recent April CPI inflation continued to show that inflationary pressure within the economy has remained benign, even despite the festive season demand spike and the pre-election spending.

The headline number registered just 1.7% YoY in April. This is just slightly above the average inflation of 1.5% in the first three months of the year.

While we expect inflation to rise gradually to about 2.4-2.5% by year end, the trajectory of inflation has turned outlower than we previously anticipated thus far. With this is mind, we have lowered our inflation forecasts for 2013 and 2014.

While there has been concern that the recent currency depreciation will stoke higher imported inflation, the external inflationary pressure has been low due to weak global growth.

Coupled with the domestic price stability (subsidy) programme, which will not be unwound in the near term due to risk of political backlash, inflation is unlikely to rise above the 3.0% level in the coming months.

In short, the gap between inflation and the Overnight Policy Rate (OPR) will remain and the real policy rate will stay in the positive range.

A slower growth (GDP growth in 1Q13 registered 4.1% YoY) and benign inflation outlook will provide enough justification for Bank Negara (Malaysia)to stand pat on monetary policy and keep the OPR at its current level of 3.00%.

As such, we have also removed the 50bpsrate hikes that we have earlier in our forecast. Policy rate is now expected to remain at the current level through the rest ofthe year.

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