Malaysia June inflation likely to moderate as impact of GST fades

Malaysian inflation is expected to have moderated during the month of June, as the impact that was created by the introduction of the Goods and Services Tax (GST) seems to have faded away in the last one year, leaving inflation to return to normalcy levels.

Malaysian headline consumer price index is expected to have moderated to 1.7 percent y/y, down from 2.1 percent in the previous month. Such sub-two percent inflation will last till the end of the year before the headline number is expected to creep above that from Jan 17 onwards. This is likely to bring full year inflation to 2.1 percent in 2016 and 2.4 percent in 2017, DBS reported.

Certainly, the lower-than-expected rate of inflation has remained a key factor behind the surprise rate cut by Bank Negara in its latest monetary policy meeting. The central bank had cut the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent despite an almost unanimous market expectation for it to stand pat.

In addition, the banking authority has also lowered its inflation expectations to 2 to 3 percent, slightly down from 2.5 to 3.5 percent previously. Indeed, the main drag on inflation will stem from the transport CPI index, driven mainly by the relatively low oil prices.

"Energy and commodity prices have remained subdued and will likely remain so in the months ahead," DBS commented in its recent research note.

Meanwhile, demand has remained low as well, due to a sluggish growth outlook.