26 July 2023
Malaysian inflation moderates in June, easing price pressures on transport and food items.
The annual growth in Malaysian consumer prices showed signs of moderation in June, driven mainly by easing transport inflation and slower price increases for meat, fish, and seafood. According to the Department of Statistics, the consumer price index (CPI) rose by 2.4% in June from a year earlier, compared to a 2.8% increase in May. This figure aligns with the median forecast of 13 economists polled by Reuters. Notably, the annual core inflation rate has also declined, slowing to 3.1% from the 3.5% recorded in May.
Kar Yong Ang, the OctaFX financial market analyst, commented on the recent development, stating, “Inflation rate in Malaysia has now dropped to a 14-month low. It is certainly not the kind of macro environment that will prompt the BNM [Bank Negara Malaysia, Malaysia’s central bank] to consider more rate hikes in the near-term.”
The slight moderation in inflation comes as good news for Malaysian consumers and businesses, but it also raises questions about the central bank’s future monetary policy. On July 6, BNM opted not to raise its benchmark interest rate, despite the fact that the Malaysian ringgit (MYR) had already lost 0.1% against the U.S. dollar immediately after the CPI report was released.
Explaining the MYR’s recent performance, Kar Yong Ang pointed out, “The recent strength of the ringgit has very little to do with the local factors. USDMYR plunged primarily because disinflationary trends in the U.S. have accelerated and the Fed [Federal Reserve, the U.S. central bank] is now widely expected to deliver just one more rate hike this year.”
The present scenario has led to speculation about whether BNM will adopt a less aggressive or more dovish monetary policy. Some analysts believe that rate cuts might be on the table, but others argue that it might be premature. Rate cuts are typically associated with an imminent recession or declining economic activity, which is not currently observed in Malaysia. In fact, the country’s industrial output experienced a surge of 4.7% year-on-year in May, while the trade balance improved to a positive $25.8 billion USD in June.
Kar Yong Ang shared his perspective, saying, “I think that BNM is certainly pleased to see price pressures ease, but core inflation is still above 3.0%, which is not entirely comfortable. The economy is not doing all that bad, but I think BNM will just stay on the sidelines for now, observing how the situation unfolds. It is too early to relax and turn dovish.”
Looking ahead, all eyes are on the upcoming press conference by the Federal Reserve, which is expected to provide crucial insights into the trajectory of rate hikes in the U.S. market. BNM officials will be closely monitoring the forward guidance from the Fed. Depending on the signals received, the Malaysian ringgit might appreciate, leading to a potential fall of the USDMYR towards 4.500 or even lower.
As the economic landscape remains uncertain, the central bank’s decision-making will be carefully watched not only by investors but also by the broader population, as it can have a significant impact on the overall economic outlook and financial stability of the nation.