KUALA LUMPUR (Jan 10): Risks are building up towards an earlier rate hike due to Malaysia’s removal of RON95 petrol subsidies, according to BMI, a Fitch Solutions company, though it officially forecasts the rate to remain unchanged this year.
The proposed RON95 petrol subsidy rationalisation — set to be implemented by mid-2025 as announced in Budget 2025 — could drive inflation higher, potentially prompting policymakers to act ‘sooner than later’, BMI said in a commentary note on Friday.
“Though it is still early days, we highlight upside risks to our inflation forecast amid the slew of government initiative announcements which could easily nudge inflation higher.”
The initiatives include an increase in monthly minimum wage beginning Feb 1, 2025 to RM1,700 from RM1,500 currently and the expanded scope of the sales and services tax effective May 1, 2025.
“Additionally, prices could come under renewed pressure when the impact of the phased salary adjustments of 15% for civil servants (5% of population) — of which 8% took place in December 2024 (Phase 1) — becomes more keenly felt.”
BMI noted that Bank Negara Malaysia (BNM) appears aligned with this view, acknowledging that while inflation is expected to remain manageable in 2025, its outlook depends on the specifics of domestic policy measures.
Despite these risks, BMI expects inflation to average 1.8% in 2024 and 2.4% in 2025, assuming no additional domestic policy changes or global price shocks.
The firm also highlighted that both headline and core inflation averaged 1.8% in the first 11 months of 2024, below the 10-year average of 2.0%. This suggests inflation remains benign enough for BNM to keep interest rates unchanged for an extended period.
BMI further pointed out that Malaysia’s resilient economic outlook, supported by ongoing investment projects that will “raise exports and expand productive capacity”, could allow BNM to preserve policy flexibility for potential economic shocks.
As a result, BMI expects the central bank to maintain the overnight policy rate (OPR) at 3% throughout the year.
The firm also anticipates the ringgit will strengthen, supported by a sustained current account surplus and a narrowing interest rate differential with the US.
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Source: EdgeProp.my
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