Malaysia's private consumption and exports on the path to moderation

Though private investment will remain robust.

Bank Negara, the central bank of Malaysia, expects growth to slow towards a more sustainable path going forward.

According to a research report from DBS, the bank highlighted that private consumption and exports are expected to moderate althouh private investment will remain robust.

However, the authority pointed out that "going into next year, inflation is projected to edge higher and is expected to be above its long-term average due to domestic cost factors."

This is essentially with reference to the impact of the introduction of the GST. Expect a sharp spike up in CPI inflation prior and during the introduction of the tax hike.

Risks of opportunistic pricing behavior by retailers and second order price pressure cannot be discounted.

Here's more from DBS:

Importantly, the central bank remains concerned abou the financial imbalances within the economy.

It iterated that "the MPC will also continue to assess risks of destabilising financial imbalances. Further adjustment to the degree of monetary accomodation may be taken depending on how new information will affect the assessment on the balance of risks."

This suggests a hawkish rhetoric and possibly more rate hikes ahead if required.

Our assessment is that beyond addressing the problem of high household debt and unhealthy leverage ratio within the financial system, Bank Negara is also taking into account the potential impact of more macro-prudential measures that may be rolled out in the forthcoming budget.

There is risk of over-tightening with both concurrent monetary and fiscal macro-prudential actions, which explains why Bank Negara has held bank from another tightening move.

Yet, with the hawkish rhetoric and risk of higher inflation expectation ahead of the GST hike, we believe the next 25bps hike will be within the first quarter of next year, just ahead of the introduction of the GST in April.