KUALA LUMPUR: Economists are maintaining their inflation and Overnight Policy Rate (OPR) targets for the year with the caveat that domestic policy changes on subsidies will determine how high inflation goes and its impact on the OPR.
Most economists expect inflation to come in between 2.5 per cent and 2.6 per cent, and the OPR to stay at 3.0 per cent.
Bank Negara Malaysia has a range of between 2.0 per cent and 3.5 per cent for the year.
The headline inflation stayed consistent at 1.8 per cent in April, matching the rates in both March and February despite expectations of a slight uptick.
The steady inflation rate in April was largely credited to lower transport price inflation and larger information and communication and clothing and footwear price deflation, which offset the price gains in food and non-alcoholic beverages, health, recreation services and culture, restaurant and accommodation services and personal care, social protection and miscellaneous goods and services.
Core inflation, which excludes volatile fresh food prices and price-administered goods, rebounded to 1.9 per cent after moderating for one-and-a-half years to 1.7 per cent in March.
It was also higher than the headline inflation by 0.1 percentage points (ppt) (March: -0.1 ppt) and above its 2016-2023 long-term average level of 1.8 per cent.
As of April, core inflation averaged 1.8 per cent (January-April 2023: +3.8 per cent).
UOB Global Economics and Markets Research senior economist Julia Goh and economist Loke Siew Ting said in a note the reading in April defied their expectation and Bloomberg consensus of a rise to 1.9 per cent.
"We maintain our 2024 full-year inflation forecast at 2.6 per cent, which excludes the effects of domestic price policy changes and subsidy rationalisation. In other words, domestic policy factors, currency movement and volatile global commodity prices are wild cards in the near-term inflation outlook," they said.
They said given that diesel carries just 0.2 per cent weight in the overall Consumer Price Index (CPI) basket, the direct impact is likely to be minimal.
The indirect impact (pass-through effects) may bear watching as an increase in diesel price will directly impact logistic costs that will cause a ripple effect on consumer prices.
Prior to the announcement on the fuel subsidy rationalisation, the government had said it would decide on the mechanism to stabilise sugar supply and prices in the second quarter.
Electricity tariffs are also due to be reviewed next month.
UOB has maintained its OPR projection at 3.0 per cent for the rest of the year given that inflation risks are still tilted to the upside while domestic growth momentum continues to face challenges.
OCBC senior Asean economist Lavanya Venkateswaran said the outlook for inflation hinges on the subsidy rationalisation plan.
"Our base case remains for Bank Negara to keep its policy rate unchanged at 3.0 per cent for the rest of this year. The details of the fuel subsidy rationalisation suggest that the government is keen to keep the inflationary impact in check. The risk, however small, is that if inflationary pressures become more persistent and pervasive, rate hikes may be back on the table," she added.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said the impact of the diesel subsidy rationalisation on inflation is expected to be minimal due to its small CPI weightage of 0.2 per cent.
He said the risk of inflation rising in the second half of 2024 remains, as some businesses may raise prices to increase their profit margins.