Although inflation peaked in June, prices are unlikely to go lower in the next few months, reinforcing Bank Negara's cautious stance on monetary policy as the external environment remains volatile and global growth slows.
Economists expect the Statistics Department's data on the consumer price index (CPI), which measures inflation, would show prices in October remained at around the same level as in September. The CPI data will be released mid next week.
September's inflation was slightly higher at 3.4% year-on-year owing to the rise in food and non-alcoholic beverage prices and transport costs. Bank Negara and most economists believe that inflation has stabilised and would moderate further in the coming months.
While they believe growth would now be the central bank's focus rather than inflation, judging from the statement released last Friday after the final monetary policy meeting of the year, opinion remains divided on when the overnight policy rate (OPR) would be cut. The OPR remains unchanged at 3%.
Maybank Investment Bank Bhd chief economist Suhaimi Ilias believes that the OPR would be maintained at 3% for the rest of next year, saying lower borrowing costs would push up asset prices.
This is in contrast with economists' reports earlier in the week which indicated the odds of a rate cut was now higher in the first quarter.
“The central bank will not be rushing to cut rates with the slower rise in prices in the first half of the year, because we don't anticipate any subsidy rationalisation exercises,” Suhaimi told StarBiz.
However, he said prices might go up in the second half of 2012 after the widely-anticipated general election (which the market expects would be held some time in March).
Suhaimi said another factor against a rate cut was that even at the current level, the OPR remained below neutral and was negative versus real interest rates.
Furthermore, third-quarter gross domestic product (GDP) data, scheduled to be released today, would show the economy has improved from the second quarter's 4%. Economists in a Bloomberg survey expect GDP to expand 4.8% year-on-year on the back of resilient domestic demand and recovery in electrical and electronics exports.
AmResearch Sdn Bhd director of economic research Manokaran Mottain said that there was still a 50:50 chance of a rate cut at the end of January, when the monetary policy committee (MPC) next meets.
“The chances are higher for a cut in March as the leading economic indicators will have shown more weakness with likelihood of recession in the eurozone but in the short term, inflation will likely be in the 3% to 3.5% range,” he said.
He added that any price increases now would be due to temporary supply constraints such as the floods in Thailand.
Manokaran pointed out the high base effect from last year's prices would have started coming down by March and, coupled with slower growth, would push the argument for a rate cut.
Meanwhile, Bank Islam Malaysia Bhd chief economist Azrul Azwar expects the CPI to rise 3.4% year-on-year in October which would not be much different from the 3.3% forecast made several months ago. “This has been tweaked to take into account price rises from the Thai floods,” he said.
Azrul expects prices to level off again in November and further moderate to below 3% next year.
He said there was a 50:50 chance of a rate cut in the first quarter. “I don't think we'll see a slowdown to the extent of what happened in 2009, but any rate cut decision (as the MPC statement alludes to) will depend a lot on what growth will be like in the coming months,” he said.