KUALA LUMPUR (Aug 22): Economists have tracked official data to lower their full-year inflation forecasts for 2025, on the back of weaker-than-expected policy impact on prices, and expectations of slowing demand in the second half of the year (2H2025).
Economists from RHB Economics and Market Strategy, UOB Global Economics and Markets Research, and CIMB Treasury and Markets Research have forecast Malaysia’s full-year inflation to range between 1.5% and 1.8% in 2025.
Bank Negara Malaysia (BNM) in July lowered its full-year inflation forecasts to 1.5%-2.3%, down from initial official forecasts of 2%-3.5%, on moderate global cost conditions, domestic policies and the prevailing commodity price trends.
Malaysia has expanded the sales and service tax (SST) this year, restructured electricity tariffs since July, and plans to retarget the current blanket RON95 fuel subsidy later this year, but economists now see the impact to be minimal or gradual.
Domestic policy developments "point to a continued benign inflation trajectory", said RHB, which revised its full-year inflation forecast downwards to 1.6% from 2%.
The firm, which previously projected inflation to average at 2.4% in 2H2025, now sees it averaging 1.8%, citing a lack of excessive demand pressures and potential economic slowdown in the latter half of the year.
UOB, which maintained its full-year inflation forecast for 2025 at 1.8%, noted that expectations for a gradual uptrend from July onwards are partly driven by the low base set in 2H2024.
July's consumer price index (CPI) rose 1.2% year-on-year (y-o-y), in line with the median 1.2% increase projected in a Bloomberg poll.
It was a slight uptick from the 1.1% y-o-y increase in June — the slowest pace since February 2021.
Businesses’ cost pass-through from spillover effects of higher global tariffs and the expanded SST may happen gradually at a more moderate pace, it said.
CIMB revised its full-year inflation forecast to 1.5% from 2.2% previously, following the latest CPI and producer price index data.
Adding to its view is a relatively strong ringgit, helping to ease imported cost pressures and reducing producers’ incentive to pass costs onto consumers. Against the US dollar, the local currency is up 5.8% this year.
Given the moderate inflation outlook and lingering downside risk to growth prospects, both UOB and CIMB see space for BNM to cut the overnight policy rate (OPR) if growth conditions soften.
UOB noted the full tariff impact on both the economy and inflation will likely be clear only in the latter part of 2025 or early 2026.
Another cut "could serve as a pre-emptive measure to reinforce growth momentum heading into 2026", said UOB, which reiterated "the potential for another 25-basis-point cut in the OPR to 2.5%" in the fourth quarter of 2025.
This is "especially given the pending confirmation of US sector-specific tariffs and the status of the US-China trade deal", as well as persistent geopolitical uncertainties, it said.