Malaysia's CPI inflation pegged at a 1.7% rise

Low inflation is expected stay range bound between 1.5-1.8% before going back to 2% by the end of 2012.

DBS Group Research said:

CPI inflation figure for June is on tap this Wednesday and a 1.7% YoY rise has been penciled into our forecast, unchanged from the reading in the previous month.

Low inflation is here to stay for a while as it is expected to stay range bound between 1.5-1.8% in the coming months before it starts to inch back up to 2.0% by the end of the year. Apart from a possible upside blip come the Ramadan festive season in July, inflationary pressure is generally expected to remain benign.

Plainly, with the persistent downside risks on growth prospects in the external environment, a resilient domestic demand is perhaps the only factor that is supporting inflationary pressure in Malaysia. Inflation would have been significantly lower if not for the fact that the domestic economic conditions have remained fairly sanguine.

While a benign inflation outlook may provide room for Bank Negara to ease off on its monetary policy, the authority's hands are tied. A lower interest rate will further exacerbate an already unhealthy household debt to GDP ratio, which currently stands at 77%.

Moreover, output gap has turned positive recently, reflecting a gradual buildup in domestic inflationary pressure. Unless a global recession occurs, expect the central bank to maintain the Overnight Policy Rate at 3.00% despite an easing inflation and slowing growth momentum.