RAM projects higher inflation in May

PETALING JAYA: RAM Ratings expects Malaysia’s headline inflation rate for May to increase to 1.9% from 1.4% in April, mainly due to faster growth in retail fuel prices.
The Department of Statistics is scheduled to release the inflation figures tomorrow.
The rating agency said in a statement today, the increase in retail fuel inflation of 5.1% in May, compared with a 0.3% contraction in April, was for the most part attributable to a low base effect.
The average RON95 fuel price in May 2017 was significantly lower at RM2.09/litre, down from April 2017’s RM2.21/litre.
RON95 prices had remained unchanged at RM2.20/litre since March 2018 and are expected to stay at this level from May 2018 onwards amid the reinstatement of subsidies.
As such, RAM Ratings said inflationary pressure from the retail fuel component is also anticipated to rise for the months of June and July, as the low base effect from a year ago increases.
It noted that uncertainty remains over the overall inflation outlook for 2018 as more policy measures are being unveiled by the new administration, with the change in tax system from Goods and Services Tax (GST) to Sales and Services Tax (SST) being the most pertinent to the full-year estimation.

“While the move to zero-rate the GST effective June 1 is expected to reduce overall inflationary pressure, the reintroduction of the SST may to some extent offset the deflationary impact of the former, subject to the final tax rate and coverage when the SST regime is put in place in September.” RAM Ratings said it will closely monitor the development of the regime to assess the expected full-year inflation rate for 2018.
“Withholding the impact of the SST’s implementation for now until more definite details are available, full-year overall inflation is envisaged to average 1.6%,” said its head of research Kristina Fong, noting that the expectation is premised on the reinstatement of fuel subsidies, lower prices amid the zero-rating of the GST and a persistently weak food price growth trajectory.
As both the economic growth and inflation are anticipated to moderate this year after having rebounded last year, RAM Ratings is maintaining its view that the Overnight Policy Rate will be kept unchanged for now.
“RAM will keep abreast of any developments in the policy direction of the new administration in its crucial first 100 days, especially concerning any potential change to the current GDP growth trajectory and risk of heightened inflation, which may then warrant a change in monetary policy.”