Malaysia inflation eases to 2.1%

But it will slowly rise in the coming months to average at around 2.7% for the full 2012 period, says OSK-DMG.

2012 inflation could still balloon from this moderate forecast -- 2011 posted full-year inflation of 3.2% -- due to the looming fuel subsidy cuts and civil servant pay hikes in the slated general elections.

Here's more from OSK-DMG:

There were no surprises in the Mar inflation data. Headline inflation continued to ease as expected, moderating from 2.2% in Feb to 2.1% yoy in Mar (OSK and consensus: 2.1%). In Mar, food prices (the largest component in the CPI basket at 30%) rose by 2.9% yoy, unchanged from Feb, while housing and transport cost (38% combined weightage) moderated a tad by 1.8% and 1.3% respectively from 1.9% and 1.4% in Feb. The rest of the components in the CPI basket also rose at a slower pace in Mar as compared to Feb, with furnishing and healthcare costs being the exception.

We think that inflation should moderate for the full-year on the back of base effects, coming in at 2.7% versus 3.2% in 2011. However, there are upside risks to our forecast, particularly from the impact from civil servant pay hikes, fuel subsidy cuts (probably coming after the general elections) and implementation of minimum wage. These could add 100-150 bps to our baseline forecast.
As for policy, we expect the easing inflationary trend to provide some room for the central bank to keep policy rates on hold for at least the first half of the year. We think that rate cuts are not likely unless the external environment worsens. However, given the build-up in inflationary pressure on the back of strong public spending and private consumption, as well as the possible further upside to inflation (as discussed above), the bias is tilted towards the normalization of rates. We think that a hike of at least 25 bps in the OPR sometime in the latter half of 2012 is possible.