Malaysia’s inflation expected to ease to 1.9% YoY

Down from 2.7% last month.

A relatively high base coupled with the sharp decline in fuel prices are the reasons behind the moderation in inflation.

According to DBS, the country’s inflation is expected to moderate in Jan15. The headline number due today will likely ease to 1.9% YoY, down from 2.7% in the previous month.

DBS adds that to rein in a deteriorating fiscal balance, the government took steps to rationalise its expenditure on subsidies in late 2013. That led to sharp spikes in pump and food prices at the tail end of 2013 and into first few months of 2014. And for this reason, inflation figure for Jan15 will look muted because of this higher base.

More importantly, the dynamics of inflation has shifted markedly. Oil price fell by more than 50% between the middle of last year to January. In fact, the decline in energy prices has allowed the authority to abolish the 31 years of old fuel subsidy regime in December.

Here’s more from DBS:

While the impending introduction of the GST in April will likely drive inflation higher, the effect is expected to be blunted by the GST offset package. Juxtaposed against a global disinflationary pressure, imported inflation will remain benign even with a weaker currency.

Indeed, inflation may well surprise on the downside even after the introduction of the GST. And with that, chance of another rate hike by Bank Negara is diminishing.