KUALA LUMPUR (Oct 20): Economists remain vigilant on the potential upside risks to Malaysia’s inflation going into 2024, despite the country’s headline consumer price index (CPI) falling to its slowest annual rate in 2½ years in September.

The upside risks to the CPI could emanate from higher food and commodity prices in the second half of the year as well as the weaker ringgit as the policy rate gap between the Federal Reserve and Bank Negara Malaysia is expected to remain substantial throughout the year.

“The softening inflationary pressure is a positive signal especially for domestic demand to stay on an expansionary path in 2HCY23.

“However, recent uptick in global energy prices and further depreciation of ringgit are among the [upside] risk factors especially in pressuring domestic food inflation rate,” said MIDF Research in a report on Friday.

The Department of Statistics reported on Friday that Malaysia’s CPI slowed to 1.9% year-on-year (y-o-y) in September 2023 — down slightly from 2% in August 2023 — marking the 13th consecutive month of decline since peaking at 4.7% in August 2022.

The September 2023 inflation rate was slightly below the consensus forecast of economists polled by Reuters and Bloomberg, at 2.2% and 2.1%, respectively.

In a note, UOB economists said there are considerable external and internal upside risks to the domestic inflation outlook which bear close watching in the near term.

They include higher cash aid, new progressive wage mechanisms, recent geopolitical tensions, regional trade restriction and expectations of higher-for-longer global interest rates that could continue to lead to persistent currency weakness.

“At this juncture, we maintain our full-year inflation forecasts at 2.8% for both 2023 and 2024 (MOF est: 2.5%-3% for 2023 and 2.1%-3.6% for 2024) while awaiting more details including the effective date on the government’s subsidy rationalization programme and indirect tax implementation,” the UOB economists said.

Meanwhile, RHB Research’s economists in a Friday note opine that the inflation trajectory in 2024 would mainly be driven by changes in domestic policies including revision in services tax coupled with the implementation of targeted subsidies approach.

The inflation momentum would be fuelled further by higher demand side pressure in tandem with improved economic momentum, the movement of oil prices and upside risks in food prices amid the lagged impact of El Nino conditions.

“Meanwhile, the headline and core inflation projection for 2023 is kept at 2.6% y-o-y and 3.1%, y-o-y respectively.

“In y-o-y terms, the headline inflation is expected to trend around 2.1% y-o-y in 2H23 (3.3% y-o-y in 1H23). In the near to medium term, we remain watchful on the potential upside risk emanating from higher food as well as commodity prices,” the RHB economists said.

The upside risks on food prices are driven by supply disruptions amid El Nino conditions and the ongoing export bans of certain food commodities, said RHB. On July 20, India curbed the export of non-basmati rice, following the restrictions on the export of sugar since October last year.

The risk for oil prices to stay elevated for the remainder of 2023, with the potential to reach US$100 per barrel by the end of the year, driven by supply constraints amid production cuts by global oil producers and escalation in geopolitical tensions, also contributed to the upside risks to inflation.

“The balance of the risks is that oil prices could stay elevated at US$100 per barrel in 1Q2024, averaging around US$90 per barrel for the remainder of 2024. At the time of writing, the Brent oil price had reached US$93 per barrel,” said the RHB economists in the report.

The recent policy manoeuvres, for example, reduction in subsidies and revision in services tax, could also have potential upside risks on inflation by 2024, they said.

Despite the potential upside risks to inflation, UOB economists do not see Bank Negara Malaysia (BNM) embarking on a policy rate hike during the next monetary policy committee meeting in November and throughout 2024.

This is because another 25 basis point (bps) hike in the overnight policy rate (OPR) will not be able to close the interest rate gap with the US rates substantially, they said, and spur market confidence on the ringgit. The current policy gap between BNM and Fed’s policy rates is 250bps.

They added that their OPR calls also take into consideration a highly uncertain global environment such as the Federal Reserve’s rate path, China’s real estate woes, and geopolitical tensions including the Israel-Hamas and Russia-Ukraine wars.

BNM will hold its last monetary policy committee (MPC) meeting for this year on Nov 1 and 2. The last time BNM raised the OPR was in May 2023, with a 25 bps hike in OPR to 3%.   

MIDF Research, which kept its headline inflation forecast at 3% for 2023, warned that the recent uptick in global energy prices and further depreciation of the ringgit are among the upside risk factors, especially in pressuring the domestic food inflation rate.

“We estimate food inflation to remain at a range of +5.5 and 6% in 2HCY23 due to an externally challenging environment especially for global agriculture output.

"Plus, prolonged depreciated ringgit among others will lead to higher imported inflation particularly via food prices as Malaysia is a net importer for most food products,” the research house added.

In tandem with the easing of headline inflation, the food and non-alcoholic beverages group, which contributed 29.5% of total CPI weight, recorded a moderate increase of 3.9% in September 2023 compared with 4.1% growth recorded in the previous month, statistics released by DOSM showed.

Food at home’s growth also slowed to 2.5% compared with 2.9% in the previous month. The increase in the component of food at home was mainly driven by the subgroup of rice, bread and other cereals at 4.1%.

This was followed by the meat, and milk, cheese and eggs subgroups, which both increased by 3.4%.

However, food away from home remained at 5.9%, the same as Aug 2023’s rate.

Still, MIDF Research's economist viewed that the softening inflationary pressure among others was due to high base effects, as the core inflation rate maintained at 2.5% y-o-y which is still above the pre-pandemic average of +1.7%.

Average 9M2023 headline inflation was at 2.8% versus 3.4% for the full year in 2022 while 9MFY2023 core inflation rate was at 3.3% compared with 2022's 3%.