KUALA LUMPUR: The adjustments in diesel prices are expected to have a minimal impact on inflation and the overall economy, according to analysts.
UOB Global Economics & Markets Research noted that diesel, which constitutes a mere 0.2 per cent of the overall consumer price index (CPI) basket, contributes only marginally to overall inflation.
UOB also said the Budi Madani cash assistance of RM200 per month is sufficient to cover 80 per cent of diesel vehicle owners based on consumption patterns.
Nevertheless, it said the second round effects or indirect pass-through impact still bear watching given the below target registration rate for Subsidised Diesel Regulation System (SKDS) 2.0, individuals, small-scale farmers, and commodity smallholders.
Following the diesel subsidy rationalisation and government sequencing of reforms, UOB noted that restructuring for RON95 fuel is next, although it is uncertain if it will be done before year-end.
"Note that Budget 2024 was silent on RON95. The timing of RON95 subsidy cuts will depend on the effects of diesel fare and the readiness of the Central Database Hub (Padu), the database platform that determines the eligibility of cash aid.
"The direct and indirect effects of price hikes for RON95, which carries 5.5 per cent weight in the overall CPI basket, will be more significant on inflation given that it affects bulk of 36.6 million registered motor vehicles and RM66.7 billion in retail sales of automotive fuel in 2023.
"Presently, non-subsidised RON95 is estimated to be priced at RM3.35 per liter versus the subsidised price of RM2.05," it said in a note.
Pending more developments on targeted diesel subsidies and announcements on RON95 fuel subsidy rationalisation, UOB has maintained its 2024 full-year inflation forecast at 2.6 per cent for the time being.
The firm also continues to expect the overnight policy rate (OPR) to be left unchanged at three per cent for the rest of the year, given that inflation risks remain tilted to the upside while domestic growth momentum still faces challenges.
It added that the unchanged forward guidance in the May monetary policy statement did not signal any potential changes in the monetary policy settings.
Bank Negara's Monetary Policy Committee will meet again on July 10–11.
Meanwhile, CIMB Securities expects policymakers to recalibrate RON95 only in the fourth quarter of 2024 (4Q24), potentially coinciding with the tabling of 2025 Budget on Oct 11.
"This is as the Ministry of Finance remains occupied with Budi Madani applications, which are expected to increase following the diesel price hike.
"As of June 3, the approval only accounts for around five per cent of the 600,000 target that the government had expected, namely 300,000 individuals and 300,000 small farmers and smallholders," it said in a note.
CIMB Securities also said the government may wait for June and July inflation data to be released on July 24 and August 22 respectively, to assess the impact of the diesel mechanism before proceeding with RON95 subsidy cuts.
It believes that there will be a wider implication of the RON95 subsidy cut on household purchasing power compared to diesel.
"The direct contribution of a 10 per cent increase in the RON95 retail price to headline inflation is estimated at around 0.5 percentage points (compared to diesel's 0.02 percentage points), based on the petrol CPI weight of 5.5 per cent," it said.
As such, CIMB Securities revised down its headline inflation forecast from 2.7 per cent to 2.3 per cent for 2024.
The firm also expects the electricity tariffs to remain broadly stable in the second half of 2024 (2H24) through the imbalance cost pass-through mechanism and the RON95 subsidy rationlisation to be announced in Budget 2025, with the earliest implementation in 4Q24.
"We maintain our OPR forecast at three per cent as inflation will hover within the official forecast of two per cent to 3.5 per cent.
"GDP growth recovery momentum remains intact (1Q24: 4.2 per cent, 4Q24: 2.9 per cent) and Bank Negara Malaysia continues to take a data-dependent stance," the firm added.