MALAYSIA’S headline inflation for next year is projected to rise to 2.7%, driven mainly by additional pressure from the switch to targeted fuel subsidies, continued spillover effects from the reintroduction of the sales and services tax, and the low-base effects during the three months when the goods and services tax was zero-rated.

RAM Rating Services Bhd (RAM Ratings) said the projection depends on the implementation of the targeted fuel-subsidy mechanism in the second quarter of next year, as key details, such as the disbursement mechanism, are still scant.

The credit ratings agency said another key risk is the volatility of global crude oil prices, with the pace of inflation next year to largely depend on how effective the Organisation of the Petroleum Exporting Countries-led supply cuts will be vis-à-vis supporting global crude prices.

“Based on our estimates, every US$5 (RM20) move in the average price of brent crude will alter headline inflation by approximately 0.3 percentage points next year, barring any second-round effects on prices,” said RAM Ratings head of research Kristina Fong in a statement today.

The agency said it expects Bank Negara Malaysia to maintain the overnight policy rate at 3.25% next year, given the need to balance between capital outflow pressures and growth support.

“Although headline inflation is envisaged to accelerate next year, the pace of increase will still be rather nondescript as a trigger point, relative to the downside risks to growth from ongoing fiscal consolidation, volatile capital markets, US-China trade tensions and Brexit uncertainties,” said the statement.

RAM Ratings said Malaysia’s headline inflation rate eased to 0.3% last month from the 0.6% recorded in the preceding month, underpinned by the dissipating low-base effects on retail fuel prices.

“The price of RON95 fell 4.5% year-on-year in November, as opposed to the 1.1% increase in October.

“On account of low food inflation and the deflationary pressure from the reinstatement of fuel subsidies through the rest of this year, overall inflation is anticipated to average at 1% in 2018 against last year’s 3.7%.” – Bernama, December 17, 2018.