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Nikkei Markets

Malaysia's deflationary patch stretches through February

Bolsters rate cut expectation despite prices likely to rise in the months ahead

Bank Negara Malaysia  has stood pat since it last raised the key interest rate by 25 basis points in January 2018.   © Reuters

KUALA LUMPUR (Nikkei Markets) - Malaysia remained in the deflationary patch for two straight months as consumer prices fell faster-than-expected in February, strengthening prospects of an interest rate cut this year to support growth in a trade-reliant economy facing mounting external risks.

The consumer price index - Malaysia's main gauge of inflation - fell 0.4% in February from a year earlier, according to a statement from the Department of Statistics. That compares to a median 0.3% decrease predicted in a Nikkei Markets' poll and January's 0.7% year-on-year decline.

On a seasonally-adjusted basis, the index gained 0.2% from the previous month.

Economists said prices will edge higher in the months ahead though the latest data suggests that Bank Negara Malaysia will have room to cut interest rates if economic growth of the Southeast Asian nation deteriorates.

"The inflation data should be considered in conjunction with the weakness in high frequency indicators, including the leading index, PMI, and credit growth," said ANZ Banking Group Economist Sanjay Mathur. "This backdrop of weak inflation and growth makes a strong case for policy easing."

Earlier this month, Malaysia's central bank kept the benchmark policy interest rate unchanged at 3.25% citing expected steady economic growth and benign inflation, but indicated that it is prepared to act on risks to its outlook. BNM has stood pat since it last raised the key interest rate by 25 basis points in January 2018.

Malaysia's economic growth picked up pace in the final three months of 2018 after decelerating for four straight quarters. The third-largest Southeast Asian economy expanded 4.7% in October-to-December and ended 2018 at 4.7%, sharply slower than 5.9% growth in 2017.

Growth will likely come in at 4.9% this year, according to government projections. BNM is expected to unveil its own set of forecasts when it releases its annual report on Mar. 27.

"In March, we expect headline CPI to resurface into positive territory partly due to base effects from lower fuel prices last year," said Barclays Capital Economist Brian Tan. "We expect... core inflation to also jump, revealing a level of underlying inflation that is unlikely to be conducive for a rate cut."

The food and non-alcoholic beverages index, which carries the largest weighting at 29.5%, climbed 1% from a year earlier in February. The index for transport group, that includes gasoline and diesel, slumped 6.8% year-on-year.

Core inflation, which excludes most volatile items such as fresh food and energy prices, rose 0.3% in February compared to the same month last year.

BNM expects average headline inflation to be "broadly stable" for 2019 as a whole compared to 2018. Still, underlying inflation is expected to be sustained, supported by the steady expansion in economic activity and in the absence of strong demand pressures, BNM had said earlier.

--Jason Ng

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