Malaysia: CPI Inflation to spike above 4%, again
The monetary and fiscal policy mix supports the prospect of continued strong economic growth, but beware inflation
Inflation set to stabilise in 2018
We expect the lingering impact of a hike in retail fuel prices in early August and rising food prices to boost CPI inflation above 4% in September (INGF: 4.1%, consensus: 4.3%, prior 3.7%). The authorities are due to release CPI data tomorrow.
Food and oil-related fuel and transport prices have been the main factors responsible for near-doubling of inflation this year to 4.0% YTD in August from 2.3% a year ago. While these factors will mostly remain in play for the rest of the year, we expect the high base effect is likely to push inflation closer to 3% by the end 2017, and further below 3% in 2018.
We forecast average inflation in 2017 of 3.8%, close to the top end of Bank Negara’s 3-4% forecast range. Our forecast for 2018 is 2.5%. The consensus forecasts are 3.7% and 2.5% for 2017 and 2018, respectively
Malaysian ringgit appreciation stubbed by offshore trading curbs
A most likely source of downside inflation risk is accelerated MYR appreciation. The MYR was Asia’s best performing currency in September and retains that status in October, moving up from the middle of the Asian pack until the year-to-August. We see a greater potential of MYR appreciation in correction of a large REER-basis undervaluation left by 2014 oil price crash. Although strong economic activity supports the MYR appreciation trend, recent curbs on offshore trading hinder it.
Monetary tightening measures look increasingly possible
We think the central bank (BNM) may be among the few Asian central banks pondering a monetary tightening as of now (central banks of Korea, Singapore and Philippines are the others). Elevated inflation has left real interest rates in negative territory (the BNM’s overnight policy rate is 3.00%). Unless corrected in the period ahead, the continued currency undervaluation will be potentially more inflationary. As for growth, 2017 has shaped to be the best year in last four, with our 5.6% GDP growth revised up recently from 5.4%.
| 5.6% |
GDP Growth 2017Revised up from 5.4% |
Elections in 2018
However, we are inclined to see BNM among the majority of Asian central banks which we expect to start tightening in the second half of 2018, on our view that the authorities will not desire to unsettle growth-friendly macroeconomic policy setting until the general election to be held in August 2018 (though could be called earlier than that if the ruling government wished to capitalize on a strong economic performance and a split opposition). Instead, with an eye on those elections, Prime Minister and Finance Minister Najib are likely to announce a populist Federal Budget for 2018 next week (October 27).
Download
Download article"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).