KUALA LUMPUR: Malaysia's headline inflation is expected to stay elevated in the near term before decelerating in 2023, UOB said.
The Singapore bank said despite steady headline inflation in November of 4.0 per cent, food inflation had accelerated further to the highest level since April 2009's 7.3 per cent.
"The government is prioritising measures to relieve the cost of living by addressing demand and supply factors. This will be one of the core issues in focus during the re-tabling of Budget 2023 in February 2023.
"The outcome on inflation will depend on whether the new government implements targeted subsidies on a gradual, staggered, or delayed basis next year," its economists Julia Goh and Loke Siew Ting said in a note.
UOB said given that electricity tariffs had been kept unchanged for households and small businesses until mid-2023, the government was mindful of upside inflation risks particularly if blanket subsidies are removed.
"Under a potential scenario of gradual fuel price hikes every quarter that could lift headline inflation to 4.0 per cent in 2023 albeit this only imputes the direct impact from fuel without the potential spillovers to prices of other goods and services.
"Assuming that fuel prices are unchanged in the first half (1H) 2023 and then gradually raised in 2H 2023, headline inflation could be capped at 3.5 per cent," it said.
UOB has not imputed any removal of subsidies into its inflation forecasts for now.
Hence, its full-year inflation stands at 3.5 per cent for 2022 and 2.8 per cent for 2023.
This was against the government's projection of 3.3 per cent in 2022 and 2.8-3.3 per cent in 2023.
"Given that headline inflation remains elevated and core inflation shows no signs of easing amid ongoing demand-side pressures, particularly during the year-end festive and holiday period, we expect the Overnight Policy Rate (OPR) to be hiked by another 50 basis points (bps) to 3.25 per cent in the first quarter (Q1) 2023 and thereafter staying unchanged at this level for the rest of the year.
"We expect the next 25bps rate hike at the monetary policy meeting on Jan 18-19 followed by another 25bps hike on March 8-9," it added.