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Economy

Malaysia tip toes out of deflationary patch in March

Retail prices rise after two straight months of decline, rate cut looms

KUALA LUMPUR (Nikkei Markets) - Malaysia's consumer prices in March edged higher, shrugging off a two-month deflationary patch, while tepid pricing pressure strengthened calls for an interest rate cut to rev up economic growth.

The consumer price index - Malaysia's main gauge of inflation - rose 0.2% in March from a year earlier, according to a statement from the Department of Statistics. That compares to a median 0.3% increase predicted by seven economists in a Nikkei Markets poll. The latest data eased concerns of potential risk of deflation after February's 0.4% fall and January's 0.7% year-on-year decline.

The March index gained 0.2% from the previous month.

"We expect the headline inflation to hover around current levels until May," ANZ Research said in an investor note. The house expects Bank Negara Malaysia to cut the overnight policy rate by a quarter percentage point to 3% when it reviews the monetary policy on May 7.

"We think Bank Negara Malaysia can afford to lower rates marginally," added Julia Goh, economist at United Overseas Bank.

In March, 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 was 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.

Inflation rate is expected to edge higher from June as comparison with feeble year-earlier readings following changes in local tax policy will likely magnify some 2019 prints, ANZ said. "Overall, inflation does not pose a constraint to policy easing, in our view."

Data out earlier Wednesday showed the food and non-alcoholic beverages index, which carries the highest weighting, climbed 1.1% from a year earlier in March.

"Even as food inflation continues on a rising trend over the rest of the year, this will likely be offset by weakness in other CPI components such as clothing, healthcare, communication, and miscellaneous goods - all implying well-anchored inflation expectations," said Prakash Sakpal, economist at ING, who also expects the BNM to cut the policy rate next month.

In March, the index for housing, water, electricity, gas and other fuels rose 2%, education by 1.3% and restaurant and hotels by 1%. The index for transport group that includes gasoline and diesel fell 3% year-on-year in March.

The benign pricing environment times with a squeeze in public investments, which in part has crimped activities in the Southeast Asia's third-largest economy. Latest macroeconomic data for January and February suggest economic growth could slow between 4.2% and 4.4% in the first quarter this year from 4.7% expansion rate in the October-December period, and 5.4% in the first three months of 2018. said UOB's Goh.

Economists, including from the World Bank, expect lingering trade tension between U.S. and China - Malaysia's two major trading partners - and feeble global demand to weigh on the country's growth prospects in the current quarter.

Earlier Wednesday, the World Bank forecast Malaysia's gross domestic product to increase 4.6% in 2020, slowing a tad from this year's projected expansion pace of 4.7%. Malaysia's economy grew 4.7% for the whole of 2018.

Private consumption will continue to be the main driver of growth while public investment is likely to stay subdued, the World Bank said in its East Asia and Pacific Economic Update.

--Gho Chee Yuan and Jason Ng

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