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UOB Group’s Senior Economist Julia Goh and Economist Loke Siew Ting assessed the recently published inflation figures in Malaysia.

Key Quotes

“Headline inflation held steady at 1.1% y/y in Oct (Sep: 1.1% y/y). This came in line with market and our estimates. Higher communication, health, and education services inflation held up overall CPI. Year-to-date, inflation averaged 0.6% in Jan-Oct 2019 (Jan-Oct 2018: 1.1%)”.

“The floating of fuel pump prices on a gradual basis starting in Jan 2020, a planned upward adjustment in water tariffs nationwide, and base effects would be key factors lifting inflation in 2020. We expect inflation to hover around 1.1%-1.3% for the remaining two months of 2019, before edging up above 2.0% in 2020. This leaves average full-year inflation at 0.8% in 2019 (vs. MOF forecast: 0.9%; 2018: 1.0%) and 2.5% for 2020 (MOF forecast: 2.0%)”.

“Despite expectations of higher inflation, projected levels of 2.5% in 2020 are considered reasonable. Moreover, inflation risks should be contained amid moderate demand. We do not think the upward trajectory of inflation would constrain the central bank’s ability to ease monetary policy next year. With inflation risks largely contained while risks to growth are tilted to the downside, we expect Bank Negara Malaysia (BNM) to lower the overnight policy rate (OPR) by another 25bps to 2.75% in 1Q 2020. This is to safeguard domestic growth amid lingering trade uncertainties and muted investments”.