Malaysia inflation to remain benign

A resilient domestic demand is perhaps the only factor that is supporting growth as well as driving inflationary pressure within Malaysia, says DBS.

DBS Group Research noted:

Inflation in June should continue to remain benign. A 1.7% YoY rise has been penciled into our forecast, unchanged from the reading in the previous month.

Plainly, with the persistent deterioration in external economic conditions and easing global commodity prices, a resilient domestic demand is perhaps the only factor that is supporting growth as well as driving inflationary pressure within Malaysia.

That is, inflation would have been significantly lower if not for the fact that the domestic economic conditions have remained fairly sanguine. As a matter of fact, low inflation is here to stay for a while and it is expected to stay range bound between 1.5-1.8% in the coming months before it starts to inch back up to 2.0% by the end of the year.

Apart from a possible upside blip come the Ramadan festive season in July, inflationary pressure is generally expected to remain benign. While a benign inflation outlook may provide room for Bank Negara to ease off on its monetary policy, the authority's hands are tied. A lower interest rate will further exacerbate an already unhealthy household debt to GDP ratio, which currently stands at 77%.

Moreover, output gap has turned positive recently, reflecting a gradual buildup in domestic inflationary pressure. Unless a global recession occurs, expect the central bank to maintain the Overnight Policy Rate at 3.00% despite an easing inflation and slowing growth momentum.