April 19, 2017 7:57 pm JST

Malaysia's inflation jumps to over eight-year high, still rate pause expected

KUALA LUMPUR (Nikkei Markets) - Malaysia's consumer price index rose to an over eight-year high in March, but economists widely expect the central bank will keep key policy interest rate steady to support a fragile recovery in economic activities.

The consumer price index - Malaysia's main gauge of inflation - rose 5.1% in March from a year earlier driven mostly by costlier fuel, official data Wednesday showed. That compares with a median 5.2% increase predicted in a Nikkei Markets poll and February's 4.5% year-on-year gain.

Economists said despite the latest surge in headline print, inflation will likely moderate in the months ahead as subdued domestic demand is expected to contain price pressures in the third-largest Southeast Asian economy.

"We estimate headline inflation will average 3.5% in 2017 and March's figure likely marks the peak for the year," said CIMB Investment Bank's economist Michelle Chia. Bank Negara Malaysia is expected to keep the policy rate on hold at its next monetary policy review in May and for the rest of 2017, she added.

On March 23, Bank Negara Malaysia's Governor Muhammad Ibrahim said inflation in Malaysia could exceed 4% in some months and stay relatively higher in first half of the year before moderating in the next six months.

"Growth dynamics do not point to the emergence of strong demand-pull inflationary pressures," said Weiwen Ng, a Singapore-based economist at Australia & New Zealand Banking Group. "We expect core inflation to remain relatively modest."

Still, headline inflation is expected to be more volatile from April onwards after the government moved to allow weekly adjustment in fuel prices, he said. "The weekly adjustment will allow for a faster transmission of global crude oil prices to domestic petrol pump prices," Ng added.

Core inflation, which excludes most volatile items such as fresh food and energy prices, rose 2.5% year-on-year in March, matching February's pace, data from the Department of Statistics showed.

The food and non-alcoholic beverages index, which carries the largest weighting at 30.2%, climbed 4.1% from a year earlier in March, while non-food items rose 5.6%. The index for transport group, including gasoline and diesel, surged 23% year-on-year.

"We believe the bigger policy consideration is the growth outlook, which is enjoying a significant boost from an upswing in crude palm oil production that could offset disappointing industrial production," Nomura Securities wrote in a report.

Malaysia's economy will likely expand between 4.3% and 4.8% this year, faster than 4.2% in 2016, while inflation will likely rise to between 3.0% and 4.0% in 2017 from 2.1% a year earlier, according to government forecast.

--Jason Ng

--Nikkei Markets is a real-time financial news service for South East Asia's markets published by Nikkei NewsRise Asia Pte Ltd, a Nikkei and NewsRise joint venture company. Nikkei Markets provides wide companies coverage in the region, including the Nikkei's Asia300 companies.

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