Malaysian headline inflation rises in December 2017, BNM likely to hike interest rate in January

Malaysia’s headline inflation accelerated in December. The consumer price inflation rose to 3.5 percent on a year-on-year basis, coming in line with market expectations. Meanwhile, on a sequential basis, the inflation came in at 0.1 percent.

The rise was mainly driven by food prices that rose 0.7 percent, almost double the rate recorded in November. Other major components, such as housing and utilities and transport costs, were either stable or dropped sequentially. However, the low base still led to 11.5 percent year-on-year rise in transport costs. Core inflation rate stayed flat at 2.2 percent year-on-year.

Overall, the consumer price inflation averaged 3.7 percent year-on-year in the whole of 2017, which is close to the upper bound of Bank Negara Malaysia’s inflation target of 3 percent to 4 percent. According to an ANZ research report, strong domestic demand is expected to continue to put upward price pressures. Inflation is expected to stay elevated in 2018. Base effects would become more favorable but even so, risks to the full year forecast of 2.7 percent year-on-year are to the upside.

The combination of solid economic activity and inflation momentum implies that it is appropriate for the BNM to gradually remove some monetary accommodation. Accordingly, the BNM is expected to hike its OPR by 25 basis points to 3.25 percent during tomorrow’s meeting.

“We have also pencilled in another 25bps rate hike in September. The resulting terminal policy rate of 3.50% will be the long term average policy rate”, added ANZ.

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