OCBC Bank: Malaysia could face inflationary pressures this year

PETALING JAYA: With inflation pressures pacing relatively faster vis-à-vis its Asian peers, OCBC Bank said Malaysia would need to stay vigilant for any early signs for a faster-than-expected surge in inflation in 2018.

It said in a research note that the pick-up in economic activities did not come without higher inflationary pressures, with domestic prices continuing their upward trend in fourth quarter 2017, underpinned by increases in transport costs as well as higher prices for food and non-alcoholic beverages.

Headline inflation is likely to average at the upper end of the official forecast range of 3%-4% for 2017.

OCBC said even with clear signs of growth in 2018, the economy is still susceptible to external shocks such as a global growth slowdown or geopolitical tensions.

“On the domestic front, Malaysia could face rising political noise ahead of its general election in 2018, while policy-makers would need to contend with the sizeable household debt levels.”

However, OCBC believes the Malaysian economy will continue to gain traction due to a favourable external environment, aided by the country’s status as a net exporter of crude oil.

It said Malaysia’s total trade surplus grew 16.4% in the first nine months of 2017 on the back of higher oil prices.

“With higher crude oil prices seen to date, Malaysia’s growth prospect should invariably improve given its status as a net exporter of crude oil.”

Given the strong performance in Q3 2017, gross domestic product (GDP) growth is projected to come close to the upper range of the official projection of between 5.2% and 5.7% for 2017, before moderating slightly to 5% in 2018.

“Economic growth will be supported by further traction seen in private consumption, investment spending and trade into 2018, while the fiscal spending backdrop seen from the recent Budget should bolster both consumer and investor confidence.”

Meanwhile, OCBC said Bank Negara Malaysia’s comments on its “flexibility to adjust the degree of monetary policy accommodativeness” will gear up market expectation for the start of a rate increase cycle in 2018.