KUALA LUMPUR: Malaysia's inflationary pressure is expected to increase in the second half of 2024 (2H24), with pass-through of costs due to the ongoing subsidy rationalisation.
MARC Ratings Bhd said while domestic economic activity had been gaining momentum, headline inflation rose to 2.0 per cent in May after hovering between 1.5 per cent and 1.9 per cent over the past eight months.
"This was mainly driven by higher housing and transportation costs for the month, reflecting higher costs in non discretionary items which could tame discretionary spending.
"Looking ahead, we expect inflationary pressure to increase in 2H2024, with anticipated pass-through of costs resulting from the ongoing subsidy rationalisation. Overall, we maintain our full-year inflation forecast of 2.5–3.0 per cent in 2024," it said in a note.
MARC said recent economic data for Malaysia was positive, pointing to a firm start to the second quarter of 2024 (Q2 2024).
Wholesale and retail trade accelerated to 7.5 per cent in April, consistent with the higher domestic-oriented production growth for the month.
On the external sector, Malaysia's exports grew 7.3 per cent in May, riding on higher manufacturing exports, MARC said, adding there was a broad-based improvement in exports to its major trading partners.
The firm said given signs of calmer United States (US) inflation prints over the recent months, the Malaysian Government Securities (MGS) and US Treasury (UST) markets continued to rally in June.
As the 10-year UST yield dropped by a larger margin in June, the negative 10-year MGS-UST yield differential narrowed, which helped stabilise the ringgit.
"We expect the yield differentials to narrow further as MGS yields have stabilised, compared to UST yields that may drop on rate cut expectations."
It added that despite the broad bond market rally, the tightening of credit spreads in the local corporate bond market that began in early 2023 appears to have bottomed out, as the average credit spreads between MGS and corporate bonds across the term structure remained largely stable.
"We note potentially higher-than-projected government bond issuances in 2024, driven by front-loaded supply in 1H2024 and lower revenue collection for 4M2024 based on preliminary tax data," it said.
Notwithstanding the present market consensus anticipating up to two US rate cuts by end-2024, the firm said the market may reassess the recent optimism over the progress of US disinflation.
"Unlike the market, the Federal Reserve currently projects only one rate cut and higher inflation in 2024. Further US rate cuts remain likely should the labour market weaken significantly as the unemployment rate has risen.