KUALA LUMPUR (May 11): Bank Negara Malaysia expects Malaysia’s headline inflation to temporarily spike to 6.5%-7% in April and May this year, mainly due to the lower base from exceptionally low retail fuel prices in 2Q20.
However, this will be transitory, said governor Datuk Nor Shamsiah Mohd Yunus, who expects the headline inflation to moderate in 2H21.
“We see similar developments in other countries,” Nor Shamsiah said. “Let me also be clear on another matter — Malaysia is not facing stagflationary pressures, the headline inflation is expected to moderate below 5% in June, and continue to moderate in 2H21 as the base effect dissipates,” she said at the BNM press briefing on Malaysia’s 2Q21 economic numbers.
Malaysia’s headline inflation turned positive at 0.5% in 1Q21, from a 1.5% contraction in 4Q20. This was mainly due to the base effect from fuel prices and lapse in the impact from electricity tariff rebates implemented last year. Core inflation slightly moderated to 0.7%, from 0.8% in 4Q20.
BNM has maintained its 2021 headline inflation forecast at 2.5%-4%, which it said is primarily due to the cost-push factor of higher global oil prices and other commodities, and in particular reflects low oil prices last year.
The outlook is “subject to global oil and commodity price developments”, the governor said. This is as the global market witnessed a boom that has sent prices of commodities from metals to edible oils and petrochemicals to multi-year highs on supply shocks, pent-up demand and stockpiling as the global economy stages a recovery.
During the peak of the last commodity boom in 2008, Malaysia saw its headline inflation averaged 5.4% in the year, with a spike to 8.5% in July 2008 before moderating amid the global financial crisis.
Nor Shamsiah said that while the current inflation outlook remains subject to uncertainties, there are several factors that will limit the upside risk.
This includes the retail fuel price ceiling, established in 1Q21, which will limit the knock-on impact on prices of goods and services, she said.
She added that core inflation is expected to remain subdued, averaging between 0.5% and 1% for the year, amid “continued spare capacity in the economy”.
“In view that the higher headline inflation will be driven by supply-side factors, monetary policy as a demand management tool will not be appropriate to manage this.
"Monetary policy is most effective where it complements other measures undertaken by the bank which can be targeted to the need of specific economic sectors, as well as fiscal measures implemented by the government to facilitate a more sustainable economic recovery," Nor Shamsiah said.
The bank has been and will continue to utilise its policy levers as appropriate to ensure the right mix of policies, she said.
“Monetary policy in 2021 will remain accommodative to support economic recovery by ensuring price pressures remain manageable,” she added. The central bank last maintained the overnight policy rate (OPR) at 1.75% on May 6.