Bank Negara Malaysia may announce a higher inflation forecast for 2011 when it releases its latest annual report today.
Credit Suisse economist Wu Kun Lung said the new forecast would be around 3 per cent to 4 per cent, up from 1.7 per cent in 2010.
He expects the Consumer Price Index, the inflation barometer, to rise to 3 per cent by mid-2011 and hover between 3 per cent and 3.5 per cent in the second half of the year.
"This is assuming the government hikes fuel prices two more times - in June and November, by a similar magnitude as last year's hikes."
Bank Negara appeared to be more concerned about inflation in its monetary policy statement in March, noting that "the degree of monetary accommodation may be reviewed given the sustained growth in the economy and risks to inflation".
However, given industrial production and exports remain well below pre-crisis levels, he expects the central bank to only resume rate hikes in the second half of the year.
"We expect BNM to resume its rate hikes in the third quarter, but it could be earlier (in May) if the government hikes retail fuel prices in the first half amidst a strong pick-up in domestic growth."
Malaysian consumers are less affected by higher global commodity prices as fuel and essential food items are subsidised.
He expects the Overnight Policy Rate (OPR), now at 2.75 per cent, to be hiked to 3.25 per cent by the end of 2011 and 3.5 per cent by the end of 2012.
The statutory reserve requirement ratio, which was raised to 2 per cent in March, could also be incrased further.
Credit Suisse is keeping its 5.6 per cent economic expansion target for 2011.
Higher commodity prices should boost incomes for farmers and companies in the plantation and oil and gas sectors, which should in turn lead to increased consumption and investment.
A 10 per cent rise in palm oil prices would add about 0.3 percentage points to Malaysia's real gross domestic product (GDP) growth, while a 10 per cent rise in oil prices or rubber prices would add around 0.2 percentage points to growth.
"Although some commodity prices, namely palm oil and rubber, have softened in recent weeks, their prices remain well above the average in 2010. Barring a sharp drop, we think the overall impact on 2011 growth should remain positive."
The agricultural and mining sectors together accounted for about a quarter of Malaysia's GDP in 2010.