Malaysia July headline CPI inflation likely to register 3.2 pct y/y, says DBS Bank

Malaysia’s headline CPI inflation for July due tomorrow is expected to register 3.2 percent y/y, down from 3.6 percent previously. While food inflation will remain elevated, transport inflation is still the main driver. For example, transport cost was up 10.5 percent y/y in the previous month on account of the low base in the same period last year.

However, it was also the moderation in transport inflation that led to this easing in the headline figure. The former was down from 13.1 percent in the month before and off the peak of 23.0 percent in March. In addition, transport inflation will likely continue to moderate in the coming months and driving the headline CPI inflation figure down with it as well.

In this regards, Bank Negara has kept policy rate unchanged at 3.00 percent thus far even though real policy rate is negative. Moreover, while headline inflation has been higher than policy rate, core inflation has remained stable (2.5 percent y/y in June). In short, an easing inflation coupled with an improving growth outlook mean that the central bank is in a sweet spot to maintain an accommodative monetary policy.

"Indeed, we continue to expect Bank Negara to keep the OPR at 3.00% for the rest of the year," DBS Bank commented in its latest research report.

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