UOB research expects steady rise in inflation in coming months

KUALA LUMPUR: UOB Group global economics & markets research expects a steady rise in headline inflation in the coming months, after the February consumer price index surprised on the upside.

It said this is owing to receding base effects, a hike in water tariffs, service tax adjustments and planned removal of diesel subsidies amid a weaker ringgit.

Headline inflation reaccelerated to 1.8 per cent year on year (YoY) in February 2024 defying UOB research' estimate of ti holding at 1.5 per cent.

Inflation was up due to upward adjustments in prices of water supply, passenger transport services and recreational services, which fully outpaced the moderation in food & beverages price inflation.

UOB maintained its 2024 full-year inflation forecast at 2.6 per cent which does not take into account any fuel price adjustments.

This is due to a lack of implementation details of the proposed targeted subsidy mechanism.

UOB research said the size and timing of the implementation of subsidy rationalisation particularly for fuels will be key to the pace of acceleration in headline inflation, in addition to the scope of the targeted assistance aimed at easing the burden from higher cost of living.

"Meanwhile, inflation expectations seem to have remained fairly well anchored and the economic growth momentum is likely to gain further traction, giving Bank Negara Malaysia room to extend its interest rate pause.

UOB research expects the Overnight Policy Rate (OPR) to be left unchanged at 3.00 per cent for the entire year of 2024. The next Monetary Policy Committee meet will be on May 8-9.

Starting from the January 2024 release, the basket of goods and services of the CPI has been updated based on the recommendation by the International Monetary Fund (IMF) to ensure that official statistics published reflect the latest spending patterns of consumers.

UOB research said almost all CPI components now carry different weights compared to the previous dataset and the index series was also changed for selected components following the reclassification.

"The upbeat Feb CPI reading was not totally beyond our expectations as we have pointed out in our previous report that inflation might have bottomed in Jan.

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