Malaysia fuel prices bring down inflation in August

Malaysia's inflation receded marginally in August, falling to 3.1% y/y (July: 3.3%), but slightly above our projection and the consensus forecast of 3.0%. The movements in inflation recently have largely been driven by fuel prices, which were lowered in August and have declined further in September.

In today's print, food price inflation continued to rise, climbing to 4.2% y/y, as weather-related disruptions continue to push prices higher, particularly for vegetables, meat and fruits. Services costs remain sticky, as inflation for education, communication and recreation services inched higher at the margin.

While headline inflation seems high relative to its historical average, underlying inflation remains in check. Bank Negara Malaysia has already said it expects inflation to trend higher in H2 15, so there is unlikely to be a policy response to inflation prints.

The current monetary stance will be maintained because underlying inflation is contained. Malaysia's inflation rate is expected at 2.2% and growth rate at 5.0% in 2015, estimates Barclays. BNM sounded cautious about the global growth backdrop in its latest policy statement. 

"The central bank is likely to maintain its current monetary policy stance until Q2 16. Moreoover, despite recent market volatility, BNM is unlikely to undertake an interest rate defence of the MYR", added Barclays.