Malaysia's inflation pegged to hit 2.6% in October

Higher inflation, slower growth.

According to  DBS, Malaysia's inflation will remain high at 2.6% YoY in October, unchanged from the previous month. 

While this is certainly above the sub-two percent inflation that Malaysia has been enjoying over the past 17 months ending Aug13, one has to understand that the recent spike up in inflation is largely policy-driven.

Here's more:

To rein in a deteriorating fiscal balance, the government cut both Ron 95 petrol and diesel subsidies by MYR 0.20 per litre. This raised the pump prices for RON95 petrol to MYR 2.10/litre and diesel to MYR 2.00/litre, up from MYR 1.90 and MYR 1.80 respectively.

While that will save about MYR 3.3bn per year for the government, the inflationary effect has been manifested in the headline inflation number.

In addition, sugar subsidy has also been cut in the recent budget. Although the direct effect on food prices is unlikely to be significant, the risk is on opportunistic pricing behavior by retailers to capitalise on the cuts in subsidies.

Indeed, inflation is rising while growth is slowing. The days of strong growth, low inflation is coming to an end. This is the price to pay in order to rein in the fiscal deficit. A process that is necessary to bring about longer term fiscal sustainability and economic stability.

But there is little justification for Bank Negara to start tightening on monetary policy. Growth momentum is already slowing on easing domestic demand while the inflationary impact of policy changes will be transient.

As long as inflation expectation remains moderated by slower growth, the central bank will most likely maintain a steady keel in monetary policy right through 2014.