DESPITE moderating in the fourth quarter (Q4) of 2022, headline inflation is expected to remain elevated in 2023, said Bank Negara Malaysia (BNM).

In its Economic and Monetary Review 2022 released today, BNM said: “The continued strength in domestic demand and improvement in the labour market will similarly keep the core inflation elevated in the near term.

“The elevated core inflation will trend above headline inflation for a few months in 2023.”

The central bank said on balance, both headline and core inflation are projected to average between 2.8% and 3.8% this year.

“After increasing for most of 2022, headline inflation has begun to moderate since the fourth quarter of 2022, mainly reflecting the moderation in global cost factors.

“In 2023, the more moderate global cost environment is expected to prevail given improvements in supply constraints and softening global demand, and the prices of key commodities such as oil and agricultural products are projected to average lower and contribute to lower headline inflation,” it said.

BNM said global commodity prices, one of the major causes for the rise in domestic inflation in 2022, could again drive inflation higher should the geopolitical conflict in Ukraine worsen.

“Existing domestic price controls and subsidies would also continue to partly contain inflationary pressures,” it said.

BNM said amid prolonged cost pressures over the past two years, prices may continue to catch up to significant cost increases, which could cause greater persistence in inflation and delay the reversion of inflation to its long-term average.

“Downside risks to inflation stem primarily from more subdued global commodity prices given the environment of weaker global growth.

“On the domestic front, if pent-up demand that had in part supported household spending in 2022 dissipates at a faster rate, inflationary pressures may abate,” it said.

Reopening of China’s market

BNM said developments in domestic financial markets and exchange rates would be influenced primarily by three key external risk factors, including the impact from the reopening of China’s economy, which could lift sentiments towards regional financial markets.

Notwithstanding the positive effect, it said the reopening could lead to higher-than-expected inflation that warrants tighter monetary policy responses by its central bank and induced greater volatility in its financial markets.

“Such volatility can have spillovers to Malaysia’s financial markets, but these are expected to remain manageable, reflecting the structural decline in the degree of financial market spillovers from China over the years, particularly since the devaluation of the Chinese renminbi in 2015,” it said.

BNM governor Nor Shamsiah Yusof said 2023 will remain challenging and uncertain for most economies, and global growth is expected to expand at a slower pace amid an environment of high inflation and tight monetary policy.

She said the recent banking stress in some advanced economies has added to the uncertainty.

“As a small, open economy, Malaysia would inevitably be affected by slower external demand and turbulent global financial markets,” she said. – Bernama, March 29, 2023.