KUALA LUMPUR: Malaysia's inflation, as measured by the Consumer Price Index (CPI), is expected to remain subdued at around 1.0-1.8 per cent in May, economists said.
This may rule out an additional interest rate cut by Bank Negara Malaysia at its Monetary Policy Committee meeting early next month, although economists believe a cut is still pending in the third quarter.
The CPI, which is due to be released on Wednesday, is in focus following two months of deflation in March and April.
The inflation data should also provide clues to the health of the local economy.
Last year, the country's inflation rate stood at 0.66 per cent, and 0.97 per cent in 2018.
Bank Negara pulled off a hat-trick of rate cuts so far this year, slashing the Overnight Policy Rate (OPR) three times in a row by a total of 100 basis points (bps) to 2,0 per cent.
Economists said although the Movement Control Order was lifted during the first week of May, consumer spending and business activity were lower during the month.
"However, consumers started to buy more, especially during Ramadan where demand was strong and stable. Consumers also benefited as prices were low and the ringgit appreciated against US dollar," said Juwai IQI chief economist Shan Saeed.
He said the local note had strengthened 3.73 per cent against the greenback in the last 97 days.
Shan expects the ringgit to trade between 3.97 and 4.30 against the dollar this year.
"Bank Negara has played and manoeuvred in the market smartly, taking into account the exogenous landscape was precarious and advanced economies were heading for deep recession," he said.
Shan said the central bank would continue to make tactical and strategic manoeuvring if needed.
"Appreciating ringgit is going to take care of inflation in the coming quarters as the US dollar is heading for tail end risk," he said.
He said Bank Negara was likely to reduce the OPR by 25bps in the second half of the year.
"The economy is showing resilience and we have maintained our position that Malaysia's gross domestic product (GDP) should trade between 1.0 per cent and 2.0 per cent by year-end on the premise of macroeconomic stability, aggregate demand and investment commencement," he added.
Putra Business School business development manager Associate Professor Dr Ahmed Razman Abdul Latiff expects the CPI for May to either contract slightly less than 1.0 per cent or increase marginally over April.
He said oil prices had started to stabilise last month. Therefore, the cost of transportation would be slightly increase, causing the CPI to increase again.
Malaysia's CPI fell 0.2 per cent year-on-year to 120.9 points in March from 121.1 points a year ago, as fuel costs fell in line with the plunge in global oil prices, said the Department of Statistics.
"There is a high possibility of Bank Negara to reduce interest rate by 50 basis points (bps) to 1.50 per cent to boost financial liquidity in the upcoming quarter as unemployment has started to spike due to the Covid-19 pandemic," he told the New Straits Times.
Ahmed Razman said the main factors affecting inflation level in Malaysia would be consumer confidence and market liquidity.
"Once industries are able to sustain their businesses, keeping workers and starting to hire new ones, confidence level will be increased. The government's fiscal injection into the market will also allow businesses and individuals to start consuming and spending, which in turn will help to increase the inflation level," he added.
Bank Islam chief economist Dr. Mohd Afzanizam Abdul Rashid concurred that the CPI for May might be negative prints, owing to lower fuel prices compared to last year.
He said lower inflation rate could allow the central bank to cut interest rates.
However, he said most importantly the country should provide the access to finance.
"This allows households and businesses to refinance their existing borrowings to take advantage of the lower interest rate environment," he said.