Malaysia’s inflation may have risen to 3.4% in September

CPI inflation figure for Sep11 is on tap this Friday and the headline number is likely to remain high at 3.4% YoY. Domestic inflationary pressure is what’s keeping headline inflation elevated. Food, wages, cost of services and even construction material have been on an upward trend. Such domestic inflationary pressure will keep inflation above the 3% level for the rest of the year. But as growth momentum is expected to slow, inflationary pressure should likewise ease.

This should bring overall inflation down to 2.6% in 2012. However, there are upside risks to inflation given that massive floods in neighboring countries such as Thailand will drive imported food prices to Malaysia higher. Specifically, rice prices are expected to rise significantly. Floods in various parts of Thailand and new measures by the Thai government to introduce a price floor on domestic rice production could imply higher costs of imported rice for Malaysia and other neighboring net rice importing countries.

But apart from that, overall risk to the economy is still tilted towards growth rather than inflation. Monetary policy has to stay accommodative as growth momentum continues to weaken. That is the primary reason why Bank Negara is expected to keep the interest rate normalisation process in the backburner for now. As such, the Overnight Policy Rate is likely to remain at 3.00% right through the rest of the year and into 2012.