As the government introduces various tax reforms in Budget 2025 to help address the rising cost of living MIDF Amanah Investment Bank Bhd revised its 2024 inflation forecast downward to 2% from 2.3% previously, taking into account the absence of subsidy rationalisation this year.
In its monthly economic review released yesterday, the research house expects inflation to remain stable in the coming months as the targeted RON95 subsidy will only be rolled out in mid-2025.
“For the third quarter of 2024 (3Q24), headline inflation remained unchanged at 1.9% year-on-year (YoY) compared to (+1.9% YoY in 2Q24), with the one-off diesel price hike exerting limited upside pressure on the overall consumer price index (CPI).
“Overall, CPI inflation averaged lower at 1.8% YoY in the first 9 months of 2024, as easing food inflation at 1.8% YoY offset higher inflation from non-food components, which also stood at 1.8% YoY,” it said.
Hence, MIDF anticipates that the overnight policy rate (OPR) will remain at 3% this year, given stable inflation and no significant demand pressures. Additionally, it also expects this rate to continue into next year, considering it normal for Malaysia and supportive of sustainable economic growth.
Meanwhile, Allianz SE chief economist Ludovic Subran said believes that the country’s inflation is likely to trend at 2.9% in 2025, compared to Bank Negara Malaysia (BNM)’s forecast of between 2% and 3.5% for 2024.
According to him, withdrawing subsidies and increasing the value-added tax can create a natural inflationary effect, serving as a one-time base effect.
“As a result, we anticipate inflation in Malaysia to be 2.9% in 2025, which is still below 3%, indicating that BNM is unlikely to cut interest rates in our forecast for the next 18 months.
“It may also be good to manage the ringgit, which has been the currency that unfortunately reacts quite strongly to the rest of the world,” he said.
Subran expected Malaysia’s fiscal deficit to be at 4% compared to 3.8% as announced by Prime Minister Datuk Seri Anwar Ibrahim during the Budget 2025 tabling.
“Looking at the numbers, I think it’s feasible – but the main issue is it’s going to be very hard to get the subsidies in 2025 the transport subsidies. Even if you do that, I believe that one of the things that was surprising is that the subsidies have amounted to 3.6% of gross domestic product (GDP) in 2Q24,” he said.
He also said that other countries have implemented similar measures, governments usually need to increase social transfer programmes.
“So, (if) you remove the subsidy, you introduce conditional cash transfer and provide support for rural areas and the poor people so they can withstand. I don’t think you’re going to get as much relief in the Budget 2025, but that’s why we have this buffer and we think the fiscal deficit will be around 4%,” he opined.
In a separate statement, Subran said that Malaysia’s GDP is expected to grow by 4.8% in 2024, 4.2% in 2025 and 4% in 2026.
“BNM is expected to keep its overnight policy rate (OPR) at 3% to support the ringgit and curb inflationary pressures that may stem from the phasing out of subsidies. However, the rise in minimum wage is not expected to contribute significantly to inflation,” he said.
His estimates for 2025 are rather conservative given the lower public infrastructure spend along with lower retail and manufacturing sales compared to pre-pandemic levels.
“Given the global uncertainty ahead of the US elections and the trend consolidation across the region and beyond, a cautious stance in the budget is welcomes to cushion any unintended trends,” he said.
