RAM forecasts June inflation rising to 1.9%

PETALING JAYA: RAM Ratings expects Malaysia’s headline inflation rate to rise to 1.9% in June versus 1.8% in May, due to higher retail fuel prices, offsetting the positive impact from the zero-rating of the Goods and Services Tax (GST).

The Department of Statistics is set to announce June inflation on Wednesday.

The rating agency said in a statement today, zero-rated GST is conservatively estimated to have brought headline inflation down 0.4 percentage points, but was overshadowed by a larger increase in transport fuel inflation.

The average price of RON95 fuel soared 9.9% in June, driven by significant low-base effects. Its prices had averaged RM2/litre in June 2017 compared with RM2.09 in May 2017.

The price of RON95 is expected to stay unchanged at RM2.20/litre amid the reinstatement of subsidies, until a more targeted system is introduced.

Given that average prices had declined to RM1.96/litre in July 2017, RAM said the stronger low-base effect is envisaged to again intensify the component’s inflationary pressure in July 2018.

Non-residential consumers have been facing higher electricity tariffs since July 1 following the implementation of a surcharge (1.35 sen/kWh) on the average base tariff of 39.45 sen/kWh for the period of July to December 2018.

Residential users will, however, not feel any impact as this surcharge will be funded by Kumpulan Wang Industri Elektrik, a fund set up to manage the impact of electricity tariff on consumers.

RAM head of research Kristina Fong cautioned however, that there is a small chance there may be second-round inflationary pressures from this tariff amendment, if the increase in electricity costs for businesses is passed on.

“That said, the impact of the surcharge would be moderated by the savings gleaned from zerorised GST on electricity bills and their cost of doing business, thus alleviating the need for firms to raise prices.”

The rating agency said the tendency of businesses to pass on the full cost to consumers appears low to date, as observed from the natural gas tariff hike and imposition of foreign workers’ levy on employers this year.

For the whole of 2018, overall inflation is envisaged to average 1.5% on the back of reinstated fuel subsidies, lower prices after the zero-rating of the GST and a persistently weak growth trajectory for food prices.

However, RAM said uncertainties remain over the impact of the reinstatement of the Sales and Services Tax, with respect to the rate and product and business coverage of this tax system.

Meanwhile, it does not expect any further movement in the Overnight Policy Rate for now, and it expects Bank Negara Malaysia’s future actions to be data-dependent.

“In particular, RAM will keep abreast of developments in the policy direction of the new administration, as well as the potential repercussions from the ongoing trade tensions between China and the US, which may change Malaysia’s growth and inflation trajectory.”

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