‘Inflation in May likely to stay subdued’ – Juwai IQI
Inflation is expected to remain subdued at 1.0 to 1.8 per cent in May, said economists.
Another rate cut by Bank Negara still possible in Q3, although the Movement Control Order was lifted in the first week of last month, consumer spending and business activity were weak.
This may rule out another interest rate cut by Bank Negara Malaysia early next month but economists believe a cut is still possible in the third quarter.
The Consumer Price Index (CPI), which will be released tomorrow, should also provide clues to the health of the economy following deflation in March and April.
Last year, inflation stood at 0.66 per cent and in 2018, it was 0.97 per cent.
Bank Negara has pulled off a hat-trick of rate cuts this year, slashing the Overnight Policy Rate (OPR) three times by a total of 100 basis points (bps) to 2.0 per cent.
Economists said although the Movement Control Order was lifted in the first week of last month, consumer spending and business activity were weak.
“However, consumers started to buy more, especially during Ramadan. Consumers also benefited as prices were lower and the ringgit appreciated against the US dollar,” said Juwai IQI chief economist Shan Saeed.
He said the local note had strengthened 3.73 per cent against the greenback in the last 97 days.
Saeed expects the ringgit to trade between 3.97 and 4.30 against the US dollar this year.
“Bank Negara has taken into account that the exogenous landscape was precarious and advanced economies were heading for a deep recession.”
He said the central bank would continue to make tactical and strategic manoeuvring if needed.
“An appreciating ringgit is going to take care of inflation in the coming quarters as the US dollar is heading for tail-end risk.”
He said Bank Negara is likely to reduce the OPR by 25bps in the second half of the year.
“The economy is showing resilience and we have maintained our position that Malaysia’s gross domestic product (GDP) should be between 1.0 and 2.0 per cent by year-end on the premise of macroeconomic stability, aggregate demand and investment commencement.”
Putra Business School business development manager Associate Professor Dr Ahmed Razman Abdul Latiff expects the CPI for May to contract slightly less than 1.0 per cent.
He said oil prices have started to stabilise last month. Therefore, the cost of transport will be slightly higher, causing the CPI to rise again.
The CPI fell 0.2 per cent year-on-year to 120.9 points in March from 121.1 points a year ago, as fuel costs fell in line with the plunge in global oil prices, said the Statistics Department.
“There is a high possibility Bank Negara will reduce the interest rate by 50bps to 1.5 per cent to boost liquidity as unemployment has started to spike,” he told the New Straits Times.
Razman said the main factors affecting inflation are consumer confidence and market liquidity.
“Once industries are able to sustain their operations, keep their workers and hire new ones, the confidence level will increase. The government’s fiscal injection will also allow businesses and individuals to start spending, which will help to increase the inflation level.”
Bank Islam chief economist Dr Mohd Afzanizam Abdul Rashid said the country should provide access to finance.
“This allows households and businesses to refinance their borrowings to take advantage of the lower interest rate,” he said.