Malaysian inflation is expected to remain high in August

Malaysia's August inflation is expected to remain high. The headline number due on Wednesday is estimated to register 3.3% YoY, unchanged from the previous month. Second order price effects from the introduction of the GST as well as base effect are some of the key drivers. The weaker ringgit probably has also led to higher imported inflation. 

Inflation will stay high at about 3% until after October when it is expected to ease into the 2% range due to base effect. Although oil prices have remained low so far this year, the government reduced fuel subsidy in October last year. This essential makes for a marginally higher base of comparison and henceforth an anticipated easing in the headline inflation going forward. 

Impact of the GST and the weak currency has already been manifested in the headline number. This will deliver a full year inflation of 2.4% this year and 3.3% in 2016. Despite the inflationary risk and the depreciative pressure on the ringgit, Bank Negara had maintained a stable monetary policy stance thus far and is expected to continue to do so by keeping the Overnight Policy Rate at 3.25% right till 3Q16.