Malaysia to stay pat on monetary policy despite rising inflation

A spike-up in inflation is expected. Headline CPI inflation for July is likely to register 2.8% YoY. This will be a sharp rise from 2.5% in the previous month. Second order price effects from the introduction of the GST as well as the Ramadan festive season are some of the key drivers. 

Beyond that, the depreciative pressure on the ringgit probably has led to higher imported inflation. Though low oil prices have ensured a fairly benign global inflationary pressure, the low base effect from low energy prices is gradually dissipating. For example, last month's inflation figure showed that while prices for most CPI components have remained fairly stable, the moderation in the pace of decline in transportation cost has contributed to the higher inflation. Transport inflation registered -1.4% YoY in the month, up from -4.7% as the low base effect from oil prices wears off. 

While inflation for the first half of the year averaged 1.4%, it is expected to rise gradually above 3.0% in the coming months and average 2.8% in 2H15. This will deliver a full year inflation of 2.1%. Despite gradually higher inflation and ringgit under pressure, Bank Negara will continue to stand pat on monetary policy, maintaining the Overnight Policy Rate at 3.25% for the rest of the year