Malaysia CPI inflation likely to ease further on decline in transport cost index

Malaysia April consumer price index is expected to ease further in the near term, with the headline inflation slipping to 2.0 pct on year, from 2.6 pct previously and 2.6 pct in February 2016, on decline in transport cost index.

The fall in transport costs is largely related to the slump in oil prices, leading to decline in domestic pump prices. High crude oil inventories are pushing prices in the lower trajectory, making lives cheaper. The retail fuel prices were cut by at least 4.9 pct in Mar 2016 and the effects are expected to linger into Apr 2016. In fact, inflation has persistently surprised on the downside in recent months. If such phenomenon continues, chances are high that overall CPI inflation will fall short of the projected 2.5 pct for the year, DBS reported.

Meanwhile, recognizing a softer outlook for the economy, Bank Negara kept the policy rate steady at 3.25 pct at yesterday’s meeting. Overall GDP growth is expected to fall within its forecast range of 4.0-4.5 pct.

"Separately, expectation is that inflation will continue to ebb due to due to the low energy and commodity prices and the generally subdued global inflation," DBS said in a research report.

The central bank appears fairly optimistic that both full year growth and inflation will come within its expectation. However, rhetoric from the policy statement suggests that the authority may be keeping its option open for an eventual monetary policy easing if economic conditions deteriorate further.