Inflation in Malaysia to pick up

KUALA LUMPUR (Jan 10, 2013): The country's inflation rate is expected to increase to 3.4% for the first nine months this year from 2.1% in the same period last year, reflecting one of the biggest jumps within Asia, said Standard Chartered Bank Southeast Asia regional head of research Edward Lee (pix).
"Inflation in Malaysia this year is driven internally and on the administered side… even though we're going to have better growth, there's actually still a significant drag in global economy which comes from high unemployment in the Europe area and still relatively high unemployment in the US," he told reporters after the bank's Global Research Briefing 2014 titled 'Rising East, Emerging West' yesterday.
Lee said the higher inflation, combined with subsidy cuts and some of the cooling measures introduced, will result in a slowdown in domestic demand.
"Things are slightly more expensive because you have less income to go around the goods. That will possibly lower private consumption. Overall, growth will be lower. For the last few years, domestic demand has been the main contributor to growth. In 2014, the difference is, external drag is going to diminish and domestic activity such as consumption will come lower," he added.
In addition, further subsidy cuts such as potential fuel subsidy cuts towards year-end, will add on to the inflation.
On the external economy, Lee said the improvement in the larger Western economies will be positive for Malaysia and sectors that are externally-oriented, especially those that are more cyclical and less defensive, are expected to do better this year, for example logistics and manufacturing.
"Construction could slow down slightly in my view, but there are still a lot of projects and at the same time some big projects were completed. Overall, construction is still quite high in terms of year-on-year growth but it may just be a bit slower compared with 2013," he said.
The bank has also forecast gross domestic product growth of 4.7% last year and 5.3% this year. Lee said the economy should be on a stronger footing in the second half of this year while the first half may be shaky due to the expected slow down in domestic growth.
"We do expect one hike by Bank Negara Malaysia (BNM) this year, in the last quarter of the year, in November. There are a couple of things to note. One is, we have to be cognizant of BNM's current stance. If you take a look at the last two monetary policy statements, despite the improvement in Malaysia's economy and global growth, they have been extremely lavish, to a point we're worried," he noted.
He said it expects BNM to raise the overnight policy rate by 25bps to 3.25% in the fourth quarter from the current 3%, which will reign in any further inflation expectations.
As for the Ringgit, the bank expects it to trade at RM3.25 in the first quarter, RM3.35 in the second quarter, RM3.27 in the third quarter and RM3.24 in the fourth quarter against the US dollar this year, said its Global Head of FX Research Callum Henderson in his presentation titled 'FX Outlook and Strategy 2014' at the briefing yesterday.
"The Ringgit now is much better valued but that doesn't mean it won't fall in the near term," he said.
The bank also forecast a 10% growth in the FBM KLCI by year-end.