Bank Negara's inflation forecast reflects potential pressures from targeted fuel subsidy PublicInvest

KUALA LUMPUR: Bank Negara Malaysia's inflation forecast of between 2.0 per cent and 3.5 per cent this year reflects the incorporation of potential inflationary pressures from the implementation of fuel subsidy rationalisation.

Public Investment Bank Bhd (PublicInvest) stated in a note that domestic policy factors and external influences pose significant upside risks to the inflation outlook.

Domestically, adjustments to essential item prices, particularly in energy and food sectors, could elevate prices, especially if blanket fuel subsidies are modified.

Given fuel's substantial share in the consumer price index (CPI) basket, any adjustments will directly impact headline inflation, albeit with a likely short-term effect as base effects diminish, it added.

"However, the extent of these risks hinges on potential knock-on effects, as firms may raise prices to offset increased costs, thereby amplifying broader price pressures.

"While wage-price dynamics present a potential inflationary tail risk, such second-round effects are deemed minimal in Malaysia due to the alignment of wage increases with productivity growth. Furthermore, core inflation is envisaged to average between 2.0 per cent and 3.0 per cent in 2024 (3.0 per cent in 2023)," PublicInvest said.

Nevertheless, it noted the short-term ramifications of fuel subsidy rationalisation on inflation and growth are contingent upon the magnitude and timing of price adjustments.

Additionally, the implementation of targeted assistance alongside subsidy rationalisation will play a crucial role in mitigating the impact on vulnerable segments during the transition period.

Economy Minister Rafizi Ramli recently reaffirmed Malaysia's commitment to the gradual reduction of petrol subsidies throughout the current fiscal year. The move is aimed at ameliorating the country's fiscal deficit.

"In light of this renewed emphasis, it is conceivable that the government will introduce targeted subsidies for RON95 during the second half of 2024, aligning with its strategic fiscal objectives."

Externally, Bank Negara underscored exchange rate fluctuations and global commodity price movements as additional drivers of inflationary pressure.

Sectors reliant on imports, such as food and transportation, are especially susceptible to exchange rate pass-through effects, potentially intensifying inflationary strains.

Moreover, persistent factors like geopolitical tensions and weather disturbances could contribute to upward pressure on food inflation.

PublicInvest viewed that the Overnight Policy Rate (OPR) will hold steady at 3.00 per cent through 2024 given the adjustment of the OPR to pre-pandemic levels.

"Bank Negara underscores that the existing OPR level aligns with a supportive monetary policy stance for the economy, consistent with the current evaluation of inflation and growth prospects," it added.

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