Malaysia inflation moderates in June as transport sector continues to lag

Consumer prices in Malaysia have moderated in June, coming in marginally below expectations, as prices in the transport sector continue to remain a drag on overall inflation.

The headline inflation figure in June came in marginally below expectation at 1.6 percent y/y, compared to 1.7 percent forecast by DBS and overall consensus of 1.8 percent. Transport inflation registered -8.5 percent y/y given that the effects of the earlier downward adjustments in pump prices in March have continued to linger.

The retail fuel prices were cut by at least 4.9 percent in March amid the slump in global energy prices. And with demand pressure likely to stay weak due to the sluggish global outlook, inflation is expected to remain subdued in the months ahead, DBS reported.

Indeed, the surprise rate cut by Bank Negara (BNM) in its latest monetary policy meeting was based primarily on lower-than-expected inflation scenario. The central bank cut the Overnight Policy Rate (OPR) by 25 basis points to 3.00 percent despite an almost unanimous market expectation for it to remain on hold.

Meanwhile, the central bank has lowered its inflation forecast to 2.0-3.0 percent, down from 2.5 to 3.5 percent previously. It pointed out that "inflation was lower as the impact from the Goods and Services Tax (GST) implemented in April 2015 has lapsed and is expected to remain stable in an environment of low global energy and commodity prices and generally subdued global inflation," DBS reported.