Malaysia: Inflation dropped further in September – UOB

Headline inflation unexpectedly decelerated further to 1.9% y/y in Sep (Aug: +2.0%), marking the lowest rate since Mar 2021 and 13 consecutive months of easing. The reading defied our estimate and Bloomberg consensus for an uptick to 2.3% and 2.1% respectively. The better-than-expected inflation outturn was primarily thanks to a continued moderation in food and most services price inflation, which offset the price hike in rice, tobacco products and jewelleries during the month. 

At this juncture, we maintain our full-year inflation forecasts at 2.8% for both 2023 and 2024 (MOF est: 2.5%-3.0% for 2023 and 2.1%-3.6% for 2024) while awaiting more details including the effective date on the government’s subsidy rationalization program and indirect tax implementation. There are also other considerable external and internal upside risks to the domestic inflation outlook which bear close watching in the near term. They include higher cash aids, new progressive wage mechanism, recent geopolitical tensions, regional trade restriction and expectations of higher-for-longer global interest rates that could continue to lead to persistent currency weakness. 

Overall, most threats to price pressures are cost-push factors. This emerges along with increasing signs of softening domestic demand as well as tighter global monetary and financial conditions. The Unity Government has also just unveiled a slight expansionary budget for 2024 to boost growth momentum. Thus, we see Bank Negara Malaysia (BNM) facing dilemma over further interest rate hikes at the next and final monetary policy meeting of this year on 1-2 Nov. We stick to our view that BNM will remain on hold, keeping the overnight policy rate (OPR) at 3.00% next month and throughout 2024.