Fuel prices keep up pressure on Malaysia CPI

Malaysia's inflation moved much higher in July, rising to 3.3% y/y (June: 2.5%) is more than expected. The big increase in inflation continues to be driven by fuel prices, which were raised again in July, and are now up 1.6% y/y, the first positive print since December 2014. Some of the impact will be rolled back during August-September, as oil prices recently have receded again. In today's print, food price inflation rose modestly to 3.8% y/y, partially due to the festive Ramadan period. But food prices are expected to moderate at the margin in next two to three prints, says Barclays. Services CPI inflation also increased, rising to 4.0% y/y in July,

"Inflation may have risen, but it is unlikely to be a cause of concern. Bank Negara has already said it expects inflation to trend higher in H2 15, so we think there is unlikely to be a policy response. We think the current monetary stance will be maintained because underlying inflation is contained. We forecast 2015 inflation at 2.2%, down from 3.1% in 2014. Also, we recently raised our 2015 growth forecast to 5.0% from 4.5%," estimates Barclays.

BNM sounded cautious about the global environment in its latest policy statement, and now the central bank is expected to keep rates on hold through 2015 and only look to raise rates by mid-2016, adds Barclays. Despite recent market volatility, BNM is not expected to undertake an interest rate defence of the MYR.