These headwinds will drive Malaysia's inflation towards 3%

It's set to steadily trend upwards.

According to DBS, inflation risk is rising. And this is despite the current level of benign inflation. Latest February inflation reading register 1.5% YoY, unchanged from the previous month.

This is much line with DBS' view that inflation has bottomed and is set to rise steadily in the coming months. Persistently strong domestic demand, coupled with the wage hikes and rapid increase in property prices are stoking inflationary pressures.

These factors will likely drive inflation towards the 3% mark in the coming months.

Here's more from DBS:

Though market is not expecting any rate hike in the near term, risk of a monetary action by the central bank in the second half of the year is rising if the authority hopes to anchor inflation expectations.

Full year inflation is likely to average 2.8% this year and probably 3.2% in 2014. This calls for policy vigilance and possibly upward adjustment in the policy rate to pre-empt against rising inflationary pressures and anchor inflation expectations.

We expect the central bank to tap on the brake slightly and hike the OPR by 50bps in the second half of the year to take the policy rate to 3.50%.