Malaysia inflation to inch up to 1.7%

Good news it's still comparably lower than the rest of Malaysia's peers.

According to DBS, Malaysia is currently enjoying one of the lowest inflation rates in the region. Although headline inflation for June is likely to inch higher to 1.7%, from 1.6% previously, it is still comparably lower than what’s experienced by many regional countries presently. Full year inflation is expected to average just 2.0%.

Here's more from DBS:

Second quarter GDP growth figures and CPI inflation number for July are due this week. A 4.6% YoY expansion has been penciled into our forecast, a tad slower than the 4.7% growth recorded in the first quarter. In sequential terms, growth momentum slowed to 3.0% QoQ saar, from 5.7% previously.

Despite the external headwinds, the saving grace is that domestic demand is holding up. Private consumption growth is likely to inch a tad higher to 7.5%, compared to 7.4% YoY previously. A buoyant domestic labor market has improved sentiment, thereby encouraging consumers to loosen their purse strings.

Although private investment growth may slow to about 12% in the second quarter, from 16.2% previously, it is still fairly healthy growth considering the global uncertainties. A healthy pipeline of government developmental projects, liberalisation in the services sector as well as public-private partnership initiatives are gradually having the intended effect of stimulating domestic investment.

However, there are significant downside risks on the external front. Exports and industrial production growth have been wavering. And PMIs of key export markets have also declined, reflecting the waning demand and cautiousness by overseas manufacturers. Signs are also popping up that the electronics sector is dipping into a slump again. Plainly, net exports will remain a drag on headline GDP growth.

Fundamentally, although most will point to the government’s subsidy programme as the linchpin for the domestic price stability, one should not forget the consistent monetary policy rolled out by Bank Negara (Malaysia) since 2010 amid the risks of the European debt crisis. Unlike some central banks that tend to flip-flop between tightening and loosening from time to time, BNM has maintained a tight rein on inflation and a close vigilance on domestic financial stability.

Malaysia’s monetary policy over recent years is perhaps the most credible and consistent amongst regional peers. And for that, inflation will remain low and monetary policy can afford to remain in cruise control mode.